As initially covered in Anatomy of a Lead Gen Industry, the business of lead generation can be broken down into three main components: 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.
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