Thoughts on Tech, Deals, and Markets

Competitive Advantage in Lead Gen: Part IV

with one comment

Recently I’ve explained how lead gen businesses gain competitive advantages through a positive feedback loop driven by scale and technology, through efficient traffic buying, and through conversion and optimization.  In this post, I’m going to cover the final piece of the puzzle, the competitive advantages that can be achieved through customer relationships, or distribution (confusingly, many in the industry also use ‘distribution’ to refer to their consumer audience.)

These advantages take different forms across verticals.  It’s most pronounced in verticals such as home improvement/home services and insurance, where geo-targeted leads can be sold multiple times.  This creates huge variance in lead monetization between stronger and weaker players.

In these verticals, lead generators face a chicken-and-egg problem as they scale.  If they want to generate leads in a new location, they want to first have agents (insurance) or contractors (home improvement) to which they can sell.  But in order to get those agents/contractors to sign on as customers, they need to have leads to sell them.

In most cases, a lead generator attempting to scale into new locales will generate leads before building up a big customer base.  They will be forced to sell most of the leads they generate to lead aggregators (I define a lead aggregator as a lead gen company that generates less than 50% of its leads from internal traffic sources) that have strong disribution.   This can be more profitable for the lead generator than the alternative–not selling a lead–but it can hurt.  Lead aggregators will typically offer  30-40%  payouts, meaning the lead generator is giving up a lot of upside.  This is testament to the value of having a strong lead distribution network, which is huge when you think about the value of a lead sold once vs. 3, 4, or 5 times.  Companies such as ServiceMagic, ReliableRemodeler.com, Netquote, and Insureme all have large distribution networks that represent significant competitive advantages.

Lead gen companies can also differentiate themselves by building trust with their customers.  This might not seem like a big deal, except it is when you’re dealing in the murky world of online marketing.  Countless lead gen companies have shot themselves in the foot by letting their lead quality suffer as they try to generate more volume.  One of the wonderful ironies of the space is that every lead gen company claims to have great lead quality, yet most complain about the quality of their competitors.

In this context, a lead gen company that can rigorously control quality over the long-term can built up extremely valuable relationship capital with their customers.  These customers will be the first to benefit from a customer’s increased lead spend and the last to get cut back.

In addition, customer goodwill also enables lead gen companies with scale to exercise pricing power.  Like oil and unlike a giant box of cereal from Costco, lead pricing increases with more demand.  A lead gen company with scale and deep customer relationships can push price increases on to their customers by explaining that the price increases are necessary to increase volume while maintaining quality.  This is true on one level, but it’s also true that this is how a lead gen company at scale can enhance its margins.  That can only happen, of course, because of the powerful competitive advantages it enjoys.

Written by sandykory

February 5, 2009 at 1:50 pm

Posted in Uncategorized

One Response

Subscribe to comments with RSS.

  1. […] Competitive Advantage in Lead Gen Part IV Possibly related posts: (automatically generated)Competitive Advantage in Lead Gen: Part IVLead Generation Services […]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: