There is a topic for which I am unusually passionate. It is a distinction that to many even inside the world of internet advertising means little, yet it explains the difference between so much of what we see online today – that of affiliate vs. arbitrager.  As I wrote previously, “At its most essential, the affiliate has an audience they try to which they cater, where as the arbitrager has only traffic. The true affiliate has their own site, their own brand in which they’ve invested time, money, and ego. They have something to lose if they mess-up. They can’t just fold-up shop and start again. The arbitrager on the other hand is the day trader who at the extreme is ephemeral, defined by his appearing and then disappearing act.” The fake blog fiasco which has culminated in lawsuits against 500 individuals and companies and will result in countless more when the FTC investigations become public has seen its fair share of blame thrown at affiliates, but the true culprit is the arbitrage.  When people take financial risk and make decisions purely based on the need to recover costs and then some, that leads to behavioral detrimental to advertisers and the marketers.

Arbitrage isn’t all bad and those who perform arbitrage, from a small search affiliate up to the venture-back technology powerhouse Adchemy, can do it such a way that it adds value throughout the entire value chain – from end user to end buyer of the lead. Arbitrage in lead generation is such a tricky topic, though, that the turning on the affiliate tap must happen with great care.  While it should be the traffic driver’s responsibility to ensure that the advertiser’s best interest are kept in mind, what we continue to see is that self-interest takes precedence and that means the advertiser must do the same. The buyer must be an informed buyer and understand the traffic side of the equation.

Let’s look at particularly interesting example that highlights:

1. The affiliate challenge – how do you find third-parties that will drive quality consumers. How do you find a partner that understands your business objectives and do not just what they say they will but in good judgment.
2. The need for informed buyers – one who enters with an understanding of what they will and won’t accept along with a target cost per acquisition. It also means a buyer that has in place the means to follow-up with leads, the ability to track the performance of leads, and communicates back to the affiliate the performance on as granular level as possible.
3. The difference between those a partner and liability – everyone in the value chain wants to make money, but when it gets of alignment, no one wins; unlike a car, where it’s easy to tell when alignment isn’t there, it’s not always as easy when profit is involved.

This example comes from a recent post from famed affiliate-marketing rabble-rouser Jeremy “Shoemoney” Shoemaker, titled “Cashing in on Cash For Clunker With MySpace.” The reader of his very well trafficked blog (and quasi-online community)  readers contain a large number of those hoping to glean the secrets to making money online. It’s a very different audience than one would find at LeadCon, for instance. This example caught my attention because it dealt 100% with lead generation. In short, Jeremy knew a local Omaha Nebraska Chevrolet dealer who already had a sales team handling internet leads and crafted an agreement to sell them leads at $10 a piece.  As he writes, “I told them I would charge them $10 per internet lead (a small fraction of what they are currently paying) but with the condition I could publish a lot of the data on my case study (what your reading). I also told them I wanted to exclusively use MySpace for this test because in past ones we mainly focused on Facebook for driving social network traffic. ”

So far so good. Enterprising guy crafts own opportunity. Where things get interesting are the results.  Jeremy writes (emphasis added),  “Our average CPC for this ad was AMAZINGLY low. 13 cents per click on average for over 800 clicks which converted to about 600+ total leads. Now at $10 per internet lead coming to us its not hard to see how crazy profitable this is.”

Below is the screenshot he shared in the post.

It goes without saying that the 74% conversion rate is rather unheard of. It helped that his landing page contained only 4 fields and paid an above market premium for that number of fields.  What’s implied from the post though is that you too could make $6000  from a spend of barely over $100.  Go to it.

Naturally there is a spread that comes from identifying opportunity from market inefficiencies. The big question is how much. In typical online lead generation opportunities, the answer is – not that much. This is a rare mix of overpriced leads ($10 auto for four fields), low value inventory (with questionable geo-targeting at the hyper local level), a high market demand (cash for clunkers), and a savvy marketer (Jeremy), no to mention the years of leg work by other companies in the lead gen world who made selling leads to a local dealer possible.

This rare mix makes from highly charged conversations, which played themselves out in the comments highlighting a new issue with third-party partners.

Partner vs. Pilferer

The comments from the Cash for Clunkers Lead Gen experiment are among the most elucidating possible when describing the distinction between the two and what we call the Affiliate Conundrum. (Those below have been shortened where needed and bad spelling fixed, not grammar though.)

Partner Persona

I don’t believe the numbers… 600 leads out of 800 clicks is extremely high. Also, How many of those leads gave fake information. short term profits, but ruining a long term relationship

Pilferer Persona

Good to know there’s people like you out there that have no interest in being profitable. When you go to a restaurant, do you ask for 80% off becuase it REALLY doesn’t cost that much to make the food? How about the computer you’re on , did you ask for 95% off because there’s only $20 worth of materials in it? If it’s not profitable for a commission based company, they won’t do it. $6000 is a drop in a bucket for many car companies, and they already are paying way more than that for online leads (about $20 for full reg info).

Partner Persona

do you think they are asking for the $10 for that fake lead back, or do they just let go, because according to you, that $10 is just a drop in the bucket. I doubt 100% of these leads are real, and that adds up…

leads from cars.com, autobytel, vehix are easily worth $20 for full reg… those are people looking for a car and serious… $10 for a phone number from myspace???

everything aside… do you really believe 100% of the leads are valid??? what percent do you guys think are fake? 40%, 50%, 60%…

Pilferer Persona

I never thought one could earn from such a scheme. You really think out of the box.

Partner Persona

800 clicks which converted to about 600+ total leads >>> NOT POSSIBLE, no one gets this conversion rate on any website. This is a joke and flat out fabrication. Never in the history of doing this for 11 years can you get this type of conversion of a quality lead. Garbage yes, quality, not way.

What matters is cost per sale and based on MySpace demographics today, it doesn’t add up. In the off chance this worked for Cash for Clunkers, it isn’t a model that will work long term. Where is the info on the dealers actual close rate on these leads?

Pilferer Persona

Excellent case study, and a meaningful recipe to make some decent cash.

ShoeMoney

This is also why we started doing the leads for only $10 which was a small fraction of what they were paying another company for internet leads. They asked me not to reveal exact specifics but in general car dealerships make about 1-1.5k per car on the low end that they sell. On 600 people if they sold 10 cars then this was profitable for them. Again they asked me not to reveal exact stats (believe me I would love to) but there is a reason they are calling me every day to see if I know anyone who can do this for them full time for 100k/year or so.

Summing it up

Luckily, it seems that in this example, the only true fail was the dealer’s prior online lead generation campaigns. That this example didn’t result in a complete meltdown makes it at least easier to objectively analyze the types of players involved.  What we see are definitely those that seem aware of the end buyer’s needs and genuinely interested in seeing those goal hit. We also see a vocal contingent more interested with the profit available to them, independent of how their results transalte upstream. The defining metric seems relative profitability. Jeremy writes, “I know to a lot of people out there would think 6k/profit per month was a lot of money.”

For legitimate partners, several thousand dollars doesn’t mean much, but for individuals it can make a big difference. And, more often than not individuals comprise the pilferers. They are the hungry souls who hang on to every word that a guru writes, the group that acts like they have nothing to lose because more often than not they do. They are the ones that give the notion of third-party partners a bad name and make arbitrage seem the culprit as opposed to human nature being the culprit. They want quick results, and wary be the advertiser who like those affiliates doesn’t want to put in the time to see lasting results. They will instead see results that last, but they won’t be the desired ones.

1. They play some part in connecting users with companies – those interested in a good or service with a provider of that service
2. They work on a real-time basis
3. They more often than not try to solve an online to offline divide, i.e., users search online for a good or service but a key element of the transaction for that good or service generally occurs offline (be it phone calls or in person visits).

Were we trying to solve the question of what makes for a good vertical, we would also want to add the following:

• The industries tend to have rather complex products
• The life time value of a customer is high

The complex product piece isn’t always necessary. If we think about finding a cleaning service or a plumber; those don’t require an explanation (like a complex insurance product would), but they do require offline fulfillment. In the past, and still today, those trying create new marketplaces for online lead generation will focus on complex products first, because it generally means a greater likelihood of getting a customer on the phone.

The online / offline divide, generally means that much of the follow-up must take place on the phone. It is one of the elements that makes online lead generation special. There is a dual-risk. A lead seller generally must spend money to generate a lead for the buyer, but the lead buyer makes no money off the data received. It’s one thing I like about the model. There is some cost (time), but there isn’t a physical cost. That is not the case with all types of customer acquisition, and it is why Lead Generation cannot be synonymous with customer acquisition.

Here is the way I view the world:

The “What Is Lead Generation,” post focuses on the left hand portion of the umbrella. The right hand side of the umbrella operates on a different model. All companies under the umbrella want new consumers, but for certain companies, it doesn’t make sense to purchase leads.  They could try to purchase leads, but that would fall under Database Marketing as opposed the Transaction Oriented which encompasses upwards of 85% of the dollars spent in the online lead generation ecosystem.

Companies on the right half of the umbrella all share something in common, especially online, they collect billing information. Unlike a conversion on a lead form, a conversion that takes place with a transaction oriented company doesn’t happen without the user entering their payment details. Transaction companies might have email sign-ups and other no-cost ways to extend a dialog, but from a conversion standpoint, it means the ability to charge.

Where things get tricky, at least from the marketing standpoint, is when looking at continuity programs. The ability to charge a user is a very powerful tool, and for services that we like, we don’t mind. While we may pay more than we like for certain recurring charges, that they occur every month doesn’t both us. Currently, the trouble comes from the perfect storm of cheap media and borderline illegal marketing techniques used by marketers promoting unbranded continuity programs where users sign-up for a free trial without being made aware of the full extent of the charges and their being easy mechanisms for cancelling.

When we use the term lead generation, it refers to activities in the ecosystem of online lead generation including those companies that attend our industry conference, LeadsCon, e.g. those focusing in online education, insurance, financial services, home improvement, and business services to name a few sectors. This ecosystem includes:

• Lead buyers both large and small. Large would be entities like the well-known University of Phoenix or Esurance.  Small encompasses everyone from the individual insurance agent to contractor.
• Lead aggregators – marketing service firms that supply leads to multiple lead buyers. These companies can be technology specialists such as Vantage Media, conglomerates spanning multiple channels and verticals like Quinstreet, or vertically oriented firms such as Education Dynamics.
• Lead sellers – companies here tend to resemble mini-versions of aggregators. The biggest distinction between the two is that the classic lead seller doesn’t work directly with the lead buyer but with the aggregator who essentially plays the role of an affiliate network.
• Technology solution providers – those who make the funnel more effective and accurate, whether on the lead scoring, lead verification front, by enabling hot transfers, or making sure landing pages convert better.
• Consumer sites – sites building up their own brand and not just looking to buy traffic for instant conversion purposes, e.g., BillShrink, KnowBeforeYouApply, Credit Karma, and Tripology.

The above ecosystem shares the following in common.

1. They connect users with companies – those interested in a good or service with a provider of that service
2. They work on a real-time basis
3. They more often than not solve an online to offline divide, i.e., users search online for a good or service but a key element of the transaction for that good or service generally occurs offline (be it phone calls or in person visits).

The above applies for evertying from refinancing one’s home, planning an adventure trip, to renting a crane for a construction site. It’s a very specific type of activity, but one that encompasses a multi-billion dollar ecosystem. It works for businesses connecting to consumers and businesses connecting to other businesses, although the vast majority of dollars and companies focus on B2C.

Lead Generation, as a term, tends to be used quite frequently in other areas as well, but these uses do not follow the above three principles above and so we list them for comparative purposes only.

• Sales Leads / B2B Lead Generation / Demand Generation – There is some debate among the online lead generation community regarding the term “Sales Leads.” Our friends at Pontiflex, make the distinction between Sales Leads and Marketing Leads, putting all of the above in the Sales Leads category because the compaies look to transact versus what they call Marketing Leads where a company looks to build its database of customers to market to, i.e. buying opt-in co-registration. While that distinction makes sense in the context of just online education or insurance vs. building an email list, it doesn’t do a sufficient job of helping differentiate between what they call Sales Leads and what the offline lead generation ecosystem calls Sales Leads, the latter in existence and in use well before Pontiflex decided upon such a term to help it sell co-registration to brands.
  The classic Sales Lead is does connect a potential service user with a company offering that service, and it often is used for complex transactions that cannot take place online. The key difference though is that a Sales Lead as it is most commonly known doesn’t involve a real-time request from a potential customer. It is more often than not a name on a sales person’s list that matches the criteria of a potential candidate. It is more akin to cold calling. Demand Generation on the other hand, tends to refer to using techniques such as Whitepapers to create interest and/or at the very least a prospect list that a sales person can follow-up on to try and close. Again, they refer to a very different type of activity.
• C2C (MLM) Leads – More frequently, we see the term lead generation used among the community of those trying to make money by joining various work-from-home programs, such as Amway, Herbalife, Monavie, and an unlimited number of lesser known but equally prominent schemes.  It is something I’m very critical of especially when compared with the affiliate marketing industry.  Those in this space focus on building their downstream, and the more web savy ones use online lead generation, i.e. buy leads of people who are being told they can make great money working from home not selling, etc. It is often a real-time request, but it doesn’t solve any online to offline issue. The gap is purposely put in there to create a sales environment.

History of commerce tells us that the more we buy the cheaper it should be per unit. Shopping at places like Wal-Mart, Sam’s Club, or Costco illustrate this and have trained consumers to expect to pay less per-unit the more units we buy. For example, a single soda might cost $.60 a can, a six-pack $.40 per can, and a dozen $.30 per can. This per unit cost reduction happens through economies of scale. The stores can sell it to us for less because the manufacturers charge them less. The manufacturers charge the stores less because their cost per unit drops the more they make, and big orders mean larger amounts of money coming in more digestible and predictable chunks.

Lead generation as a market does not, however, follow this pattern. On the whole, the more leads you want to buy, the higher the cost per lead will be. There are no economies of scale for an advertiser at higher volumes. What’s more, the price per lead over time does not drop; there is no Moore’s Law with lead marketplaces. The economics of lead generation mirror more closely those of scarce resources, like oil extraction.

There is only so much oil in existence. The question around oil is not how much is left but how much can be produced, i.e. the supply. In a given reserve, the early oil is the easiest and cheapest. Costs increase as the reserves empty out. This is the key to understanding lead generation pricing. The easiest and cheapest leads come first. The more you buy (extract) the more it costs, as leads are in many ways a non-renewable resource. Unlike oil, we will not use up every lead – the constantly evolving economy and population insures fresh supply. The demand for new leads, however, laps the natural market growth, insuring costs per leads will both increase over time and as volume for leads increases.

With the respect to the economics of lead generation, the important thing to remember is that buying leads is not the same as buying fixed price media. Were you to buy media in bulk on a fixed price, you would get a price break – that is guaranteed revenue for the owner of the inventory, and they would lower the price in order to secure the revenue. Leads, though, are not guaranteed for the seller. Each lead must be earned, and the incremental cost to acquire a lead increases with each one for the sellers and thus the buyers. Over the past six years the market has shown this to be the case across countless verticals. When companies ask for more money for increased volume they do so as a reflection of their costs not in attempt to fleece the lead buyers.

To understand lead pricing, you must  understand 1) how lead markets change over time and 2) the cost curve that a particular lead buyer should expect. Presented below are those two graphs. The first is a view of a lead market over time containing the costs for both buyers and sellers. The second is from the perspective of a lead buyer (the advertiser) and looks at cost per unit as it relates to volume of leads.

Explanation of Graph 1

Note: The red line represents the average cost per lead paid by a buyer in a particular vertical. The blue line represents the average cost of acquisition, i.e. the cost of media; the difference between the two is the profit.

• Stage 1, “Early” – when just introducing a new type of lead into the market the cost per lead an advertiser needs to pay is at its lowest. Latent demand exists; the audience has not been exposed to the offer, and it does not directly compete for media space, nor are many sellers running it. The cost per lead for the lead seller (the publisher) is low but not at its lowest point as there is some economies of scale they will experience as they learn how to market the offer effectively. This period is the “fresh oil” for buyers and sellers.
• Stage 2, “Mature” – the offer has proven itself in the marketplace; this is the point where great strides in volume are made as more and more sources of traffic are used; prices begin to increase as the offer becomes prominent and it begins to compete against other offers for media space. Lead seller costs can decrease during this period as they understand its performance, e.g. where to buy, keywords, landing pages, etc. Towards the end of this period though, both costs for the buyer and seller begin to rise. This period is where “peak production” is reached and a flood of additional sellers will enter the market.
• Stage 3, “Saturated” – costs for the lead buyers begin to rise steeply as the market saturates; the demand for leads outstrips the production rate of supply; incremental costs for leads increase dramatically as buyers and sellers compete heavily against other offers in the market place, and each other; performance declines due to overexposure, which only increases the difficulty the offer has competing for, not just media but, seller attention. Margins for lead sellers shrink, their costs rising proportionately faster than those of the buyers; this is the period of final extraction from the well where vast quantities might exist but in a manner that costs more and more to extract. The lead buyer must focus internally and look for areas of fragmentation and differentiation to stimulate supply and/or reach the remaining supply economically. The seller must try to become more efficient in order to compete for inventory and among other sellers for the same offer. Think Hungry Hungry Hippo; it’s not pretty.

Explanation of Graph 2 – this graph looks at the cost per lead as a function of volume of leads desired by a specific buyer. This graph illustrates why a greater number of leads will cost more money per unit. As mentioned in Part One, this graph is not speculation or fleecing by sellers (publishers); this is the established trend that has emerged across all mature, high volume lead verticals.

• Phase 1, “Low Hanging Fruit” – buyers of leads in low volume tend to pay more per lead than buyers of similar leads that buy in bigger amounts; as buyers increase their capacity they can experience some economies of scale; lead sellers charge more for small clients because of their internal costs and the opportunity cost, i.e. the seller needs to earn a higher margin per lead to cover their fixed costs and to make up for not working with a larger client; as buyers begin to scale, though, they will achieve both internal and external economies of scale resulting in the ability to pay a lower cost per lead on all leads bought; as they grow, they enter into the “Sweet Spot.”
• Phase 2, “Sweet Spot” – during this phase lead buyers reach the optimum balance of volume and cost per unit; companies can scale the number of leads without significantly increasing their cost per lead; here the number of leads purchased matches available demand; it is comparable to the period of oil extraction where production reaches a constant flow and stable costs; as the desire for greater lead flow during a given period increases, companies enter Phase 3.
• Phase 3, “Chasing the Tail” – a section characterized primarily by diseconomies of scale and a non-linear relationship between cost and volume; during this period, as volume increases, it passes the optimal point, meaning there is no added benefit for both the buyers and sellers; the easy leads are gone; there is competition with other advertisers for the better converting inventory; the offer is saturated, and sellers have other, potentially more lucrative uses for their resources; with eroding performance and margins, prices must rise to finance the high production costs; peak production will be reached and buyers will find themselves hitting a volume wall where increases in cost yield negligible increases in volume.

The market view and buyer view, Graphs 1 and 2, are designed as two complimentary ways to explain, visually, how costs for leads rise over time. Both time and volume play similar roles. Lead prices will increase over time as the easy leads get taken early and auction effects come into play. As volume needs increase, more and more of what’s left are the harder to reach leads, combined with more expensive media, and increased competition among sellers to reach the shrinking pool of people. All of which add further price pressure as sellers have an incentive to work on other industries. It’s a cycle that cannot be escaped, having already played out in countless companies in a variety of lead verticals. Increasing prices for leads are as the Matrix’s Smith says “inevitable.”

Source: DM Confidential.com You may view the two part article here and here.
Original Post Date: March 2006

In 2006, I received an email, which said, “I am setting up an online media campaign on a cost-per-lead basis for an online University. I am working on a final budget and would like to come up with an average CPA for this campaign… Please contact me to workout specifics.” Unfortunately, the specifics did not include a client name, but it did require an RFP (Request for Proposal). Not coming from the agency world, the thought of an RFP to run an online education campaign seems incongruous. The world of online lead generation is a dual risk world – both the lead buyer and seller take risk. The idea of an RFP is typically for a supplier to pitch someone spending money. That makes sense when fixed dollars are at stake but less so when a supplier receives payment on a purely performance basis. The two parties will clearly agree upon what constitutes acceptible leads, but buyers and sellers work on that and other specifics together.  For those wondering why a lead seller fill out a sheet pitching themselves, especially to a new buyer, the market is too full of larger partners with more experience. A lead seller will simply focus on those.

The point, however, was not to criticize the approach but to help answer the question of the average CPA and volume factors. In general (with respect to online education):

• The average CPA depends on many factors. One of them deals with the school itself, and that is whether the offer is online only, ground only, or both. If it’s both, one factor is how many campuses they have. Online programs tend to pay slightly lower than campus ones, and programs with greater geographic restrictions will also cost more.
• Course selection plays a role not in necessarily in price but in volume. Schools that offer a larger variety of courses will convert users better than ones with a narrow selection. Ones with only a handful of courses, and especially if niche, will be asked to pay more.
• Form fields play a role too. Forms that require only the bare minimum convert better and can justify a market competitive price. Those that ask more personal and less common questions will have a lower conversion rate, lower lead volume and cost more per lead.
• Who hosts the form is yet another factor. Some schools do not let the vendors design and host landing pages. This in my opinion is a mistake. In the beginning, firms could do this and still get volume. Specialization is the name of the game now. Companies specialize in obtaining traffic. The specialize in landing page design, in optimization of pages, in optimization of which pages go with which traffic sources, and so on. One page fits all will have a hard time competing in a one-landing page will not fit all world.
• Taking the above into consideration, most vendors can quote an average CPA, but the smart ones now focus less on CPA and more on enrollment cost. Many vendors – those with affiliates for instance, more generally those who have various sources of traffic, see different performance across each. One price fits all means vendors must overpay for some and underpay for another. Again, this is because not all traffic performs the same. It’s the vary reason Google has their Smart Pricing, charging advertisers different CPC’s for the same keyword based on the source of the traffic.
• A factor that this planner should take into consideration is whether the offer is a school that is already being marketed; if so, it will be difficult to get placement unless this person’s company is taking over all placements, ala Advertising.com and Apollo. Generally, only a new school that hasn’t been online will get consideration with the stated restrictions – one price, potentially one landing page, RFP.
• A point to this planner is to have them prepped for the fact that most vendors will ask to host the form and transfer data to the school; it’s driven not just because of specialization but that many vendors will want to integrate the school into their existing education portals
• As for potential volume, the largest of the online schools process more than 200,000 leads per month. Schools that have low budgets and lead caps will have a hard time getting an audience. This school will want to be able to accept at least 500 leads. The fewer leads they accept the more it will cost per lead.
• So, what does all of this mean if pressed for an average CPA? Typical schools pay out – $12 to $20 for a shared lead (similar to mortgage model); $30 to $40 for average exclusive leads, and $45 to $55 for higher quality leads (better student to enrollment rate). But, I strongly suggest and encourage being able to track not just leads but enrollments and as granularly as possible.

Most fascinating to me about the email request for information is that it hints at a process that runs counter to today’s right pricing trend. We’ve started to hit a point where even the “shadier” vendors understand that quality impacts price, so it’s easy to take for granted that others might not understand the dynamics of a given vertical. I have assumed the above was equivalent to CPM, known by all. In case it isn’t, may the above help.