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Think Big. Move Fast.

There has been some vigorous comment discussion on the post of 2007 consumer internet predictions, mostly about the lead gen prediction. Firstly, its wonderful to get comments – thank you. When you first start blogging it feels like shouting out a window into the darkness; you’re not really sure if anyone is out there, listening. It’s good to know that I’m not just talking to myself!

On to lead gen. There were two broad schools of thought on the state of lead gen. One is epitomized by a Jason Calacanis’ comment which, while lacking in detail, none the less crisply conveys his opinion of the industry and those who work in it.

Lead generation is dead. Companies would really be foolish to start a new leadgen company – especially NOW. Geesh.

Others shared more detail, and see a troubling situation as the arbitrage opportunities between buying CPC advertising and selling leads dry up. The markets, both in paid search and in remnant banner advertising, have become more efficient, squeezing margins for lead gen companies.

Yet others are more optimistic. Langley Steinert (co-founder of TripAdvisor, now CEO of Cargurus.com, and one of the pioneers of lead generation) believes that advertisers would much prefer to pay for leads, and others agree, although sometimes with reservations about if this is in the long term interest of the lead buyers

How can we reconcile some of these positions?

Simplifying substantially, lead gen comprises three processes:

1. Acquiring traffic (e.g. from paid search, organic search, brand advertising, banner advertising, distribution deals etc).
2. Converting traffic to leads through a form-fill process
3. Finding the highest value for a lead among multiple buyers (ie having a network of advertisers and knowing who placed what value on each lead)

Historically, most lead gen companies have been vertically integrated, doing all three processes. Also, historically, lead gen has been focused on a small number of industries, including mortgage lending (including refi, and home equity), consumer credit (including credit cards, educational lending, auto loans), new auto sales and online education.

In these industries, I think it’s fair to say that margins are shrinking and that competition is growing fiercer. The market, while not perfect, is becoming a lot more efficient. Some companies have established a competitive advantage in process #1 by locking in traffic either from organic search, from long term distribution deals, or by having established branded destinations (e.g. Lending Tree). Others have established a competitive advantage in process #3 through the breadth of their buyer network (e.g. Autobytel). Entering these markets today is going to be a tough road to hoe.

As I said in my prior post, I think we’ll see similar principles applied in other categories that also have high customer value, can sustain a sales person’s costs, are infrequent purchases by consumers and have complexity in the decision making process. Possibilities include wedding photography, plastic surgery, LASIK, cosmetic dentistry, eldercare, even business purchases. These categories still allow arbitrage opportunities between CPC advertising and lead gen as they are still inefficient. However, they will also become efficient over time, and long term winners will need to establish competitive advantage in processes #1 and #2 as outlined above.

Interestingly enough, some companies, notably Leadpoint and Root Exchange, are trying to commoditize process #3 by establishing a “marketplace” for buyers and sellers of leads to efficiently find each other (taking a cut of the transaction in the process). If they are successful in doing this in the newer lead gen markets, they will serve to accelerate the margin compression and force successful lead gen companies to focus on the three elements of traffic acquisition that can sustain arbitrage: organic search traffic, branded destination traffic and long term distribution relationships.

It will be interesting to see how this industry plays out. Comments and thoughts, especially from industry practitioners, most welcome.

UPDATE: Some very interesting comments posted – worth reading if you are only getting a feed

  • http://hitchhiker.blogsome.com will

    well thought through, agree completely! . . .

    One minor thing is that I would still not invest in companies using organic search as the main source of leads. Topline will fluctuate significantly based on Google’s algorithm update cycle, which makes exit on the investment hard achieve.

    I would put money into lead gen firms masquerading as other type of companies . . . branded portal with informational resourcs (ala Lending Tree) OR some sort of social networks . . . in short, form fill is out, content and functionalities are in!

  • Matthew T

    Jeremy, already enjoying your blog and your insights; your investments seem right on.

    A few comments, but first my basic background. I ran a competitor to LowerMyBills in the MTG space for a few years; now I work in R&D for the same firm. I am an ex-nextag employee as well.

    In regards to “lead gen being dead:”
    I would augment this comment by asking if the consumer still gains value through lead gen. The answer here is yes. Whether it be due to an inquiry actually being serviced (actually finding a local advertiser for my mortgage in Boise Idaho), the ability to compare quotes (finding out that advertiser A who called me has these rates vs. advertiser B) or relatively low effort level (I need to just fill out a simple two page form), the consumer–despite an often atrocious CRM experiences–still *most of the time* gets what they came for to the site.

    In regards to new lead gen opportunities:
    Depending on what reports you look at EDU, MTG and INS make up 70% of the online lead space. That leaves “30%” for the smaller consumer demand, high ticket, immature spaces. There are clearly opportunities here for the focused company that focuses on a vertical supply chain in one of them. Why? Because the cost of advertiser acquisition vs. the ROI from the vertical will not produce as much competition as a MTG, EDU, or INS. It’s the nimble–and probably not legacy lead gen firm despite having the infrastructure—that will probably succeed in this space.

    In regards to Root and Leadpoint:
    I believe the backend of the funnel has a ways to go before being an open marketplace. Quite simply, a major lead purchaser is looking at the following metrics: predictability of volume/delivery vs. lead quality vs. price point is their main metric. While a marketplace might create and efficient market, the maintenance cost to managing lead flow from a marketplace (changing prices, lead value (california refi vs. idaho prime and a wider delivery range) are not worth the tradeoff (especially if you are managing a call center).

    Excellent comments both here and in your “Whither Widgets” post.

  • http://www.marksonland.com mike

    In my mind, steps 2 and 3 are the heart of the successful lead gen process. The first step, gathering an audience, is usually farmed out to a media company (whether it be a newspaper, TV show, etc.). Obviously the low cost of publishing plus SEO/ SEM capability has changed that some. With that, I think there is an interesting opportunity for a lead gen company to create a distributable product for placement on third party web-sites to compete with remnant banner ads, adsense, etc.

    Obviously it all comes down to conversion and the pay out for leads generated, but, given the low prices most web sites charge for remnant inventory, and the prevalent use of remnant on these sites, the hurdle isn’t that high.

    There may be some opportunity for a lead gen company to create a real alternative to adsense, and in the process, an interesting ad network.

  • saar

    We are in the early days of lead generation. As media sources continue to fragment the CPA model and the lead gen. model will continue to thrive…

    Here are some of my predictions for 2007:
    – People are going to continue to brainstorm on how to roll-up the lead gen. suppliers, no one is going to get critical mass or get it right
    – We will see a number of new incentive models and referral programs that share more of the economics with consumers in legitimate ways (Incentive 2.0)
    – Direct response folks will start to aggressively test online video ads
    – Lead gen companies will build out greater call center capabilities to further improve quality and move up the value chain
    – Big Wish: Consumers will start to “review” lead gen companies and consumer experiences, and start to draw traffic/users towards services that actually provide value and good consumer experiences (e.g., LoanInsights) vs. whoever can pay the most for media

  • Scott A

    Between, Matt T and Saar, you’ve already got some serious horsepower in your comments Jeremy. For me, the future is about matching buyers and vendors in a way that creates value for both. We should call this something more meaningful and substantial than lead gen. I hope that when we speak of “lead gen” in the future, we are referring to our revenue models – not our businesses.

  • http://blogation.blogspot.com David Z Hawk

    Good post Jeremy. I agree with you that lead gen companies are experiencing margin compression as online media arbitrage opportunities dry up. But, that does not mean the market is dead, it simply means that the less-efficient companies won’t survive and you’ll see a lot of consolidation as only the best companies survive.

    I wrote two posts on my blog on these points:

    First, on the survival of the biggest: http://blogation.blogspot.com/2006/03/walmartization-of-online-lead.html

    And second on why lead gen isn’t going away anytime soon:
    http://blogation.blogspot.com/2006/04/is-online-lead-generation-bubble-proof.html

    – David

  • http://www.scoreboard-media.com Brian Provost

    First time commentor, long time reader…

    Lead gen isn’t dead. It’s just hard for the people that suck at creating cost-effective traffic. I’m not going to name any names of people I think created weak and fragile media “empires”, but I think we all know who I’m talking about.

    Long live the competitive webmaster!

  • http://www.mingle.com mike o’brien

    Lead Gen will continue to thrive, the methods by which the personal information of the lead in assertained will change. They will become more clever and eventually have to provide some instant benefit to the potential client. This means a tighter involvement with the companies purchasing the leads and as a byproduct longer term more stable deals.

    Creating a transparent feedback loop between the lead gen company and the lead purchaser is essential for long term success and margin protection. We purchase leads from dozens of sources and their ultimate conversion rate drives both the price we pay and the value we get. The manner by which the leads are created drives their value.

    We are more than we did yesterday and anticipate buying more tomorrow.

    Cheers,
    Mike

  • mike rosenberg

    Jeremy, thanks for pointing me to your blog. From our perspective at LeadPoint, lead gen is far from dead. We are experiencing increasing volume on both the seller side and the buyer side in multiple verticals. That doesn’t include the multiple calls we get everyday from potential customers who want us to light up new verticals as soon as possible — many in the more obscure ones you have already mentioned above. We see the most successful players prospering in the Lead Gen space by is focusing and investing in their core compency and outsourcing the other functions. Those that are good at driving qualified traffic, don’t waste their time building and maintaining a buyer network. Those with lots of qualified relevant traffic but no clue how to optimize form conversion outsource it. Those with buyer networks, but no marketing abilities, outsource it. By focusing on their core strengths, most players, regardless of where they sit in the lead value chain, can generate good returns.

    Mike Rosenberg
    http://blog.leadpoint.com

  • http://carwale.com Mohit Dubey

    We have a similar experience with consumer oriented car portal in India. A year back, we tried monetizing with car purchase leads and were out rightly rejected by car dealers. They in fact ignored even our free leads. Meanwhile, we focused to generate a qualified lead at a point where consumer has done basic research and is actually making a purchase decision. Here, getting a from filled with very relevant details, is easier. Today, we could actually command a premium on our leads.

    In fact, in consumer Internet business if one got to prove followings to monetize leads:
    a) Cost of customer acquisition is lower compare to traditional sales process
    b) One is attracting genuine interested buyers ( ex. Survey like calling consumers who filled forms and getting to a conversion ratio).

  • http://www.demandbase.com Chris Golec

    From a B2B perspective, $100-$200 billion in discretionary LeadGen spend seems far from dead. It is the lifeblood of future growth for most SMB’s. Google was able to scale so quickly because they offered a leadgen service that was simple, and had a more compelling model… pay for performance. While only 1% of clicks become worthy inquiries, from worthy prospects, the shear volume of clicks attracts marketers who fall victim to FOMO – fear of missing out. Its the same reason marketers blast 10,000’s of emails out to an audience in which they intuitively know only 1,000 are their true targets.

    Successful marketing teams build the right mix of programs to generate predictable revenue results. Relying only on search or email, or anything single vendor or program is seldom the solution. There will always be room in this space for better mouse traps.

  • http://DentistInBoise.com Boise Dentist

    I never used link gen much, but it seems like some people here did.

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  • jon snow

    In online consignment business,there has been a rapid growth in India.These portals needs some quality lead gen and their survival depends on their back links power.
    Almost every portal is working hard for more organic SEO,paid links and other measures.
    Being a part of top auto portal of India,I believe we have done wonders just by organic SEO without any help of paid links.The reason is our superb content and superb organic SEO .For any portal,success lies in 25 percent in content and 75 percent in quality SEO.