Real estate marketplace Zillow is in the process of switching its "Platinum Premier Agent" advertisers from a model in which they purchase a share of the lead-generating ads displayed next to listings in a particular ZIP code, to contracts that provide agents with a fixed number of ad impressions per month.

The new impression-based pricing will allow Zillow to benefit from growth in agent subscribers and consumer traffic more efficiently, removing a theoretical cap of 12 agents advertising in each ZIP code under the old "share of voice" system, CFO Chad Cohen said in a conference call with investors.

In reporting second quarter earnings last week, Zillow said revenue was up 75 percent from a year ago, to $27.8 million, driven largely by a 70 percent increase in Premier Agent subscribers to 22,696 and a 61 percent increase in monthly unique users, to 33.5 million.

But expenses were also up 85 percent, to $26.5 million. As a result Zillow’s net income, or profit, for the quarter fell 15 percent from a year ago, to $1.3 million.

Cohen noted in the call with investors that under the "share of voice" advertising model, "as traffic grew, agents benefited from increased eyeballs from traffic volume without typically paying for that growth unless we raise prices at contract renewals."

Zillow began testing the new impression-based pricing model during the first quarter, Cohen said. Every six-month advertising contract sold to Platinum Premier Agents since the first quarter has incorporated impression-based pricing, he said.

"Agents are happy with the switch that we’ve made and obviously this allows us to benefit from our traffic growth that we’ve brought to the platform," Cohen said. "So the plan is to keep marching down that path and to complete that switch over the next six months."

A transcript of the call is posted at the website

Zillow sells advertising spots on "buyer’s agent" lists that appear on listing detail pages that have not been claimed by the listing agent. Each list can display the contact information for three Platinum Premier Agents, who receive leads from buyers who want more information about the property.

Until recently, Zillow would sell agents a share of the leads generated in their "farm area," or ZIP code. That meant that in some ZIP codes, Zillow might have waiting lists of agents who wanted to buy ads. In others, it might have few or no advertisers.

Several analysts who cover Zillow for investors had questions about how the switch to impression-based ad sales was going. Ronald Josey of ThinkEquity noted that while Zillow’s customer base continues to grow, average revenue per user was down during the second quarter.

Cohen said the decrease in average revenue per user was due to Zillow offering lower-priced "Gold" and "Silver" tiers to agents who don’t want to buy space on buyer’s agent lists.

For $49 a month, "Gold" subscribers get their photos on their own listings, and their listings are featured at the top of search results. For $10 a month, "Silver" subscribers get a "Premier Agent" website and access to Zillow’s customer relationship management (CRM) system.

"Platinum" level subscribers reportedly pay subscription fees of $200 to $300 a month on average, depending on their geographic area.

Zillow CEO Spencer Rascoff said revenue generation is "not a significant focus" of selling websites to Premier Silver agents for $10 a month.

Instead, he said, it’s a way to "initiate a relationship with the agent and then likely up-sell them into Platinum or Gold down the road."

Analyst Bradley Safalow, founder and CEO of PAA Research, asked Zillow executives if they expected the switch to impression-based advertising would allow Zillow to enter new markets.

Rascoff said that under the new impression-based model, the ads work "just as well for an agent in Syracuse as in San Francisco. They’re going to be paying a lower CPM (cost per thousand impressions) or lower monthly subscription rate in Syracuse than San Francisco, because home values are lower."

There is less demand in Syracuse, he said, "therefore we priced it (buyer’s agent list ads) lower. But the product works very well there. One of the nice things about the switch to an impression-based pricing model is, as traffic grows in Syracuse or San Francisco, there is more inventory available to sell to another agent."

Safalow told Inman News that while he believes Zillow is well on its way to establishing itself as "the de facto residential real estate search engine in the U.S.," the site is "appreciably stronger in some markets and weaker in others." Safalow said he "would like to get more color on their relative penetration in regions/markets," and was not satisfied with the level of detail the company has provided in that area.

"I know there are many markets in which they’re inventory constrained, so this will help with that," Safalow said of the move to impression-based advertising. "It will also give the company the opportunity to expand its reach with agents, some of (whom) might not be willing to pay for Platinum level pricing as the plan is currently constructed today."

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