Blog post by Dylan Lenz, Founder & CEO:
Simply, we want to accelerate our growth.
As a young company in the digital age we have to grow fast in order to survive, and sometimes that means sacrificing revenue in the short term to win market share. The leadership team at Naborly is incredibly ambitious when it comes to our vision for this company, but in order to make that vision a reality we need to scale our user base.
Over the past 12 months we’ve learned that despite how innovative and helpful our scores and reports are, we would end up competing on price against industry incumbents who simply resell credit data.
There was an industry ceiling on how much a landlord or tenant would pay for any tenant screening service or credit report, whether we liked it or not.
At the same time, I’m of the opinion that when you have to start to compete on price, you’re in a race to the bottom.
At Naborly, we’re the kind of people who like to win. So, we decided if the market was going to force us into a race to the bottom, we were going to figure out how to get there first.
In October 2017 we had signed up 15,000 new enterprise rental units to our service. In November I began quietly running an experiment with our enterprise sales team. We had the same number of sales reps, the same marketing budget, used the same marketing channels, and we didn’t even change the sales pitch.
We changed only one thing. Price.
We gave the service away for free to our new enterprise customers for 24 months, and by the end of November we had signed up over 75,000 new enterprise rental units.
This proved that Free was a hit, and not only because landlords were given a lower price. Something else happened we didn’t initially expect. The landlords who had been given early access to free screenings began to screen more tenants because they didn’t feel the need to try and pre-screen applicants themselves.
This led to more applications, faster lease ups, and more approved applications for applicants who may have been screened out in error due to the landlord or property managers reluctance to send every potential tenant a rental application.
Another very interesting thing happened. Once we were free, landlords were willing to send the prospective tenant their Naborly applications at the time they booked the showing. This led to tenants coming to the showings with the application completed which streamlined the lease process.
It also led to many tenants writing in to Naborly’s Customer Support team to thank us for waiving the application fee as other landlords have been charging up to $250 just to apply.
Many of these tenants (all from diverse age groups, cultural backgrounds, and income levels), expressed frustration with property managers and brokers who charged them for their credit and background checks, just to find out another tenant who had toured the rental ahead of them had been the one approved.
Regardless of income level, tenants were explicit that application fees were very hard for them to afford, but often they felt they had no choice. They indicated that they would go out of their way to apply to properties where there was no application fee and appreciated that Naborly allowed them to reuse their verified application, credit file, and background check to apply to other landlords.
How is Naborly able to afford giving screenings away for free?
We realized that there was a bigger opportunity than just selling reports.
When we made the decision to offer our service for free we knew that regardless of how much investor funding we had in the bank we had to have another business model to replace the existing one.
We also knew that because we were a young company with a small burn rate and supportive investors, we had an unfair advantage when it came to make the decision to go to free. Specifically, that it would be easier for us to kill off a $2 million dollar revenue line versus our established competitors who are making hundreds of millions in revenue from tenant screening.
This meant we could move faster, and that we have time to figure out the exact details of how to make the new strategy sustainable.
The business model we landed on lines up well with Naborly’s existing core competency of understanding risk: insurance.
Hundreds of landlords have asked us if we can verify their tenant’s Renter’s Insurance Policy is valid, and every week we have customers asking if we would guarantee our scores and pay the tenant’s rent if we were wrong.
That made us realize, how attractive the insurance opportunity was, especially when it came to building a business with strong recurring revenue.
You see, we had another problem. As our scores keep getting more accurate and the better our screening ability becomes, the better we do our job. This means we do fewer screenings than companies without our competitive advantage because our landlords experience fewer evictions, fewer late payments, and longer term tenancies. We were becoming the victim of our own success.
However, by us actually guaranteeing the rent or underwriting the tenant’s general liability, being better at screening would mean better business, and our interests would always be aligned with our customer’s.
Plus, our AI system Sherly, makes us unparalleled when it comes to assessing rental risks which allows us to be more competitively priced than other insurance products.
Best of all insurance allows Naborly to make our customers happy, builds trust in the market because we’re now literally putting our money where our mouth is, and best of all, it allows us to replace our existing revenue model and offer a free product that will accelerate growth.