DM CONFIDENTIAL – Last week we started with a fairly simple question on the surface: “What is lead generation?” Speaking to a company today, they actually defined it rather succinctly — research online, buy offline. We expounded upon that concept some as online is merely a channel. Lead generation or demand generation, as the business-to-business crowd refers to the practice, revolves around intent. It focuses on an expression of intent by a user and connecting potential customers with those who can help them. You can think of it as need generation from a business perspective or needs fulfillment on behalf of users. And, yes, lead generation works best for those products or services where a purchase is either complex or is best performed by an actual person — everything from finding legal assistance to the installation of solar panels.
From an online media/performance marketing perspective, lead generation has several unique features, one being dual risk. A contractor that specializes in solar panel installation can’t make money off the data received. They take a risk by agreeing to purchase data, and their work seemingly begins the moment the lead generator’s ends. They need a customer out of some percentage of the leads if they are to recoup and earn more than their marketing expense. The lead generator, though, is typically paid on a per-lead basis. Generating that lead often requires risk for them, the most obvious example being when the lead generator acts as an outsourced performance marketing firm, creating the pages, buying the media, hoping for a return.
By and large, this dual risk model works well. In new verticals, it takes some time for buyers and sellers to find an equilibrium — one where sellers can generate leads profitably and buyers still feel they can make a return. Over time, the dynamic also changes. As industries mature, prices for leads tend to go up instead of down, as the incremental lead generation required costs everyone more. Less frequently, lead prices go down, but there are factors that could cause this. We’ll use solar again as an example. It’s not the case today, but there will come a time when subsidies for solar run out. Today, it’s a less expensive proposition for homeowners because of tax benefits for switching. Those benefits increase conversion rate on the media side and on the buyer side.
When subsidies run out, conversion rates for both parties will decrease. It will mean a seller will spend more money to generate a lead because users will have a lower incentive. Similarly, buyers will have a tougher time closing leads because many will balk at the cost. We now have a scenario where neither party is particularly happy. Sellers want to charge more for the leads, but buyers want to pay less for the leads. It’s almost a lose/lose. Yet, one party will have to give if the other is to stay around. This is one area of lead gen where no precedent has really been set.
In certain verticals, the buyers have had certain demand generation goals for which they have had to bear the brunt of the increase. Buyers have paid more for a lead and have at the same time seen their cost per conversion increase, resulting in a two pronged attack on their bottom line. In these verticals, it seems as though the pressure on the buyers was the presence of other buyers. There were enough other buyers willing to take the available volume, that costs for all increased. We’re starting to see a slight shift, where buyers are cutting budgets and asking for lower lead prices. They couldn’t do so in the past, but without a deep bench and enough buyers for all their leads, sellers are having to acquiesce.
If sellers acquiesce too much, they might go out of business, and then everyone loses. The challenge, of course, is who fundamentally should bear the burden of cost increases. Neither party would feel completely comfortable sharing their margins, so it’s difficult to find a way to split the difference in the increase. In a case where the driving force of the increase is purely media-driven and unrelated to the market being, having the seller pay makes sense. It may not be desirable but it keeps alignment. In cases where it’s a buyer’s inability to convert or an inferior service, you could make a case for the seller wanting to charge them what others are paying. It’s these in-between scenarios that are tough, where no one wins but both parties need to work together to make the most out of the new, more challenging environment. Perhaps the best that we can hope for now is that each party talks to the other about the market so that they can understand how each is impacted. Then at least they can explore ways to enhance how they work together so it feels collaborative and not as though one party has to pay.