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Competitive Advantage in Lead Gen Part II

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In my last post, I mentioned the three potential layers of competitive advantage in lead gen:  media buying, conversion/optimization, and customer relationships.   In this post, I’ll talk about the challenges of media buying, aka buying traffic.

I divide paid traffic into 5 sources.  Search/PPC, banner, email, affiliate, and social media.  Each source is large enough to generate 10’s, if not 100’s, of millions of revenue a year.  Each is complex–only a gifted few can make a single source work well, and only the elite can do it in multiple sources.  What’s so hard about it?  First, the technology.  Second, and critically related to the technology, there is business knowledge needed to properly build and deploy the technology.   I.e., it takes more than engineering IQ.  It takes both engineering IQ and an unusual degree of Internet savvy.  The few who have figured it out have often done so through a trial-and-error process that cost millions, and often more.

Search/PPC:  this traffic is mostly Google AdWords, although Google’s content network, Yahoo, and MSN are significant.   Search is the highest quality traffic source.  The volume and quality attract lots of competition, so it’s very expensive.  Another difficulty is that also attracts undisciplined spenders who bid up keywords beyond their pure direct response ROI for branding or other nonsensical purposes.  For all of these reasons, search is really, really hard.  One of the biggest insurance lead aggregators, to pick one example, just gave up doing PPC even though their agent network gives them awesome monetization.  There is a reason why there are a flood of high-tech startups building technology to automate and optimize search–it’s hard.  But to truly dominate in search, it requires a flexible technology platform that constantly optimizes keywords, ad copy, bids, and landing pages, then has a feedback loop to maintain the optimization in a dynamic landscape.  No third party tool can do that yet, but a few companies can with their own technology.  When it happens, the results are staggering.  I know a lead gen company that grew 300% last year, doing 10’s of millions of revenue, with EBITDA of 30%, that only gets traffic from search.  Their automated platform scales while keeping opex low and requires no capex.  It’s an awesome business.

Banner:  online banners, or display, are also very hard for direct marketers.  The good news is that there is immense volume across the portals and ad networks.  But buying at scale is expensive.  Unlike search where you only pay for clicks, banners are almost always sold by CPM, with no performance guarantee.  Click through rates are normally paltry.  CPM rates have come down as many formerly big spenders in automotive and financial have cut back, but it’s still hard.  Only a few have done it well.  At its peak, LowerMyBills’ banners were ubiquitous and highly profitable.  Nextag is also very good in banners (not to mention search).  Similar to search, the high number of high-tech startups working on technology to make display advertising work illustrates the challenge involved.  These days, the killer app in display is using behavioral technology.  Every ad network claims its behavioral targeting is the best, but there is plenty of room for improvement.  Aside:  I think Google will eventually own the diplay intermediary business.  Like lead gen, it’s driven by scale and technology.  Once Google get’s it’s ship set in a direction, no one can touch them in those two areas.

Email:  email doesn’t require as much technology as search and banner.  But the huge variability of performance among different players illustrates the challenge involved.  For example, in the education vertical, I was told by the leading emailer that the top-performing offer had 3x the monetization of the bottom performing offer.  And the bottom performing offer was from a company that was doing over 50m in revenue and had a history of profitability.  That means it’s hard. Email is more relationship-driven than banner and search.  Knowing the right vendors to work with is incredibly valuable.  Datran and AdKnowledge are the biggest players, but there are dozens of others.

Affiliate:  affiliate overlaps with all the other channels, since affiliates can get traffic from anywhere.  Therein lies the problem–it’s very hard to manage the quality of affiliates.  Formerly major players like Adteractive have been crushed by affiliates passing them trash.  The affiliate channel is also driven by relationships.  Knowing how to find and cultivate good affiliates is difficult, yet can drive 100”s of millions of revenue.  Businesses solely dependent on affiliate traffic, such as CPA networks, have inherent instability.  Folks like Azoogle and Hydra have taken private equity and maintained profitability, but have struggled to find buyers.  Google search “Ben Edelman,” and you’ll get an idea about the dark underside of this space.  However, a business that carefully uses affiliates to supplement high quality traffic from other sources can significantly and profitably enhance its volume.

Social media:  this is an emerging source that has some overlap with other channels.  For ex, you can buy banner ads on Facebook and MySpace.   More interesting is traffic from apps, often incentivized traffic seeking virtual currency in games like Mob Wars.  A few businesses are absolutely killing it in this area.  One of them is Offerpal Media.   I think what they are doing takes one part technology and two parts business knowledge.  Figuring out how to make offers endemic in the game play and then targeting appropriately is non-trivial.  But I’m not sold that this model will last.   The key is if the incentivized traffic can convert into quality.  Lead buyers have a history of overpaying for low quality leads, so that could be the case here.  But if not, the early leaders will be able to leverage the growing volume of the channel to build scale and technology and create signficant competitive advantages.   Of course, the crazy-high margins currently seen will be competed down, but there should be multiple players doing 100’s of millions in profitable social media lead gen revenue within a few years.

The above should give visibility into the complexities and challenges of efficient traffic buying in each channel.  I should emphasize that in each channel, competition is intense and the landscape constantly evolving.  What works today will not work tomorrow.  A good example:  Google “Acai berry” and look at the ad copy in the highly competitive paid results.  You can imagine that initially all the ads touted the benefits of their acai product.  Then one clever advertiser, realizing that all the products and ad copy were undifferentiated, wrote “buyer beware” or “watch our for acai scams.”  With ad copy that stood out from the crowd, their click-through-rate (CTR) skyrocketed.  The idea was likely worth millions.  Quickly, however, competing advertisers must have realized their disadvantage and changed their ad copy.  Now, you can see that most have some variant of that copy.

Efficient traffic buying alone won’t make a great business, but it’s an important component to building a competitive moat around a lead gen business.

Written by sandykory

January 29, 2009 at 1:50 pm