As initially discussed in Anatomy of a Lead Gen Industry, the business of lead generation can be broken down into four main components. I've consolidated that number to three for this discussion, and they are: 1) Lead value, i.e. how much is a potential customer worth, 2) Demand - do only a handful of people need it or millions? Do these people have to all get it at the same time, or is the purchase patter spread throughout the years? And, 3) Product Consistency – does everyone know the product the same way - a Chevrolet Corvette is a Chevrolet Corvette anywhere in the country; a bachelor’s degree in education means the same thing in Washington Sate as it does in Washington DC. In “Anatomy of a Lead Gen Industry,” we looked at the new car purchase market to extract the underlying lead generation mechanics. This week, we look more closely at how some of these mechanics are handled in other verticals and their role in contributing to the long-term success of online lead generation.
The first component, lead value, certainly is among the most important factors in all verticals, not just the new car market. Doing lead generation for someone eating at McDonalds doesn’t make much sense. A person might spend thousands of dollars at a McDonalds, but it takes years to realize that value and the profit on that person per use is very small. Fast food restaurants, like grocery stores, are commodities, and those rarely make for verticals that can section out a reasonable dollar amount for each new customer acquisition. That is not the case with someone refinancing their home. This person doesn’t make a company perhaps ten dollars a time; this person earns a company more than a hundred thousand dollars in one shot. The profit might only be a few percentage points of the revenue, but it is still significant, and even if marketing expenses equal only 15% of the profit, it still means a lead could easily be worth $50 or more depending on conversion rate.
The reason that mortgage has become the largest online lead generation vertical certainly has to do with the fact that mortgage banking is itself a trillion dollar industry and the current economic factors that keep demand for mortgage banking services high. A lesser analyzed piece though is the way the industry handles the variations in product value across the population. Real estate in California is worth more than that in West Virginia, i.e. house values are not only higher but demand for that real estate is higher, which also means homes appreciate and hold their value better. A person in California should be worth more than one in West Virginia, and they are. The mortgage lead generation market is sophisticated enough that the final buyers pay different rates for different states. This enables marketing companies to be more efficient with their spends. They can pay more for California traffic or similarly choose not to compete for traffic in locations they cannot monetize.
The new car and education lead generation verticals do not have a mechanism for evaluating and/or differential payouts based on the characteristics of the conversion. A person interested in buying a car retailing for $70,000, for example, should be worth more than one looking at a $17,000 one. They are not. In education, certain degree programs probably lead to better students and greater profits, but if that is the case, it’s not shown in the lead price. Both verticals have been able to succeed without value-based pricing either because of enormous demand, which is the case for cars, or a large ticket price with high margins, as is the case with the education vertical.
These companies will face pressure in the future. Education in particular, will need to embrace change if it is to continue being an effective offer. Unlike automobiles, there isn’t a natural life cycle that props up demand. Chevy comes out with a new Corvette every five to six years, but the large school does not come out with a new for 2006 Bachelor’s degree. Once you have one, you have one. You don’t get the urge for a new one. That is why the market for degrees will probably face some pressure as other verticals mature and compete for its media space. If schools focus on offering more individual classes and push for tying compensation closer to true earnings, they can maintain their media leadership position.
Ultimately, true pricing is not enough; it’s one step. Mortgage, especially, has flourished by doing two other things - adopting a unified definition of what information makes up a lead and embracing a shared lead model. What this means is that Bank A and Bank B do not require different data fields – each uses the same X pieces of information, and a lead collector can not only sell that data to Bank A but also to Bank B. These two things allow lead companies to handle more buyers of leads, quicker and easier, all while earning more per completed form. Other verticals both existing and emerging will most likely have to move to this model. With education, every school requires different pieces of information, and by and large, each demands that a lead be sold only to them. The seeds of change are under way, but it has yet to become mainstream.
Hi Jay,
I love your post on the Anatomy of Lead Gen. I think the most potent point made is how other industries need to embrace semi-exclusivity. As the 600lb. gorilla in the mortgage leads space, Lending Tree sort of forced the issue down the throats of the mortgage industry back in 1998 with “When Banks Compete, You Win,” and all the other players (including iLeads, GetSmart, TheLoanPage.com, eLeadz, LowerMyBills, etc.) fell right in line. In other words, the leads companies were in the driver’s seat – “Oh, you want these leads, Mr. Mortgage Co., OK then, well here’s the deal…”
In online ed, and the other leads verticals, the buyers are in the driver’s seat (ostensibly since no big lead gen company came out in their vertical to force the issue). And, all other things being equal, what leads buyer would ever want semi-exclusive vs. exclusive? But all things are NOT equal. Moreover, it’s not a zero-sum game. I’ve yet to witness any lead vertical where there was a finite number of “deals” associated with any lead source and that one single competitor was capable of extract 100% of the available deals to be had. Rather, I have found the number of deals to be quite elastic to the number of competitors. In other words, new competitors often extract their own net new deals from lead sources.
Don’t get me wrong, conversion rates do indeed come down when new competitors are introduced, BUT only INCREMENTALLY and NOT at the same slope as the as arithmetic cost-sharing. For example, OnlineEdCo may be enjoying a 5% conversion on their $50 exclusive leads today. However, if the cost of that $50 lead was split with their competitor InternetEdCo, then OnlineEdCo’s marketing costs are instantly cut in half. The downside is that their conversion ratio will indeed drop, but it DOES NOT drop to 2.5% (half of the original 5%). My experience shows only incremental decrease to maybe 4.6% or 4.4% or so. In other words InternetEdCo brought some net new deals to the mix, and anything above 2.5% is FOUND VALUE for OnlineEdCo.
How/why does this happen?
Typically, in any vertical, leads are assigned to individual sales professionals and then tracked individually and in the aggregate. It is the one-company/sales professional to one-consumer paradigm that causes the inefficiencies. Here are some examples:
Contact patterns – Even with extremely high-quality lead sources, 30-40% NO CONTACT rates are not uncommon. Consumers that cannot be contacted cannot be sold anything. Sales professionals typically develop their own unique contact patterns. Some work early shifts and call all their leads as soon as they come into the office. Others work the late shift and call all their leads before they leave. Some prefer email, others ignore email. Since the method and the best-time-to-contact consumers is wildly un-predictable (even if the lead includes “best time to contact” data), overlapping contact patterns is the best way to increase the net contact rate with consumers, hence squeaking out net new deals.
Comfort/Culture Fit – This is simply the first 30-seconds of contact with a consumer. Is this consumer a “Georgia peach” being contacted by a hard-edge Long Island sales veteran with a raspy smoker’s-voice? That deal will obviously face significant friction in just getting to first base. A second call by a soft-spoken female rep with a southern twang may face significantly less friction.
Sales skills – It’s a well documented fact that a lead in the hands of a strong salesperson will often convert into a sale whereas it dies in the hands of a weaker salesperson. We all must concede that many leads are being put in the hands of weaker sales people every day and in every vertical. Thus, putting the lead in the hands on another competitor (who may be a stronger sales person) increases the likelihood of a sale and the value of the overall source of leads in the aggregate – again, creating net new deals.
Nature of the Offer vs. Target – The general offering of every company within a vertical is seldom identical and the likelihood of mis-matches remains quite high irrespective of sophisticated filtering options. For example, Ameriquest is not known for competitive interest rates. Rather, they focus on consumers with significant debt or other cash needs where interest rates aren’t always the driving factor. However, despite their best filter-tweaking efforts, they will often buy a lead which represents a consumer with no debt looking for nothing other than the most competitive market interest rate. In this type of situation, Ameriquest will seldom convert this lead. However, if Countrywide was also a buyer (Countrywide typically DOES offer extremely competitive interest rates) a net new deal can be brought to the table.
Of course the issue of branding somewhat complicates the matter (mortgage is a largely un-branded industry whereas online is ALL about brand), but not to the insurmountable level.
In any case, great post. And, rally on! The advertisers of the world need for the smoke to clear and the mirrors to shatter.
Posted by: Sean Fenlon | February 22, 2006 at 08:55 AM