Benjamin Kuo’s Blog

Today’s post is a guest commentary from Jim Armstrong, Managing Director of Clearstone Venture Partners.

There has been a lot of commentary over the past year about the lead generation market. At its simplest, the market can be explained as follows: Today, most businesses that are ready to spend dollars marketing online have little interest in traffic. Either there are very few sophisticated places to send it if they had it, or most businesses couldn’t monetize the traffic on their own. It isn’t their core competency. However, these same businesses do have an interest in reaching ready to buy customers. Currently, this market is served by hundreds of small, highly profitable garage shop businesses that buy keywords around a vertical or two, syndicate offers through advertising networks focused on those verticals, and drive that traffic back to a network of sites whose sole focus is to convert that traffic into an interested customer who is willing to share their contact information along with their indication of interest. This live “lead” is now very valuable to the majority of companies who already have processes in place to prospect for customers, not clicks and not impressions. Today lead generation is looked at as a profitable market filler and the main driver of the keyword market dominated by Google and Yahoo/Overture and numerous ad networks. The market is considered by many to be nothing more than click arbitrage, bound to evaporate in the near future. However, a closer look reveals why “lead generation” has a very powerful and differentiated future.

To understand where this market is going, you have to analyze where it has been. Historically, the first industries to adopt the internet as a lead generation tool were the industries where there was a) already off-line direct marketing, b) a highly considered, usually high ticket, purchase and c) a well understood cost of customer acquisition figure. Automotive purchase and home finance have led the way.

The market has moved rapidly beyond the automotive and home finance verticals as the informational attributes of the internet have convinced more and more people to realize that the web should be there first point of education for nearly any purchase. In the consumer realm this includes cruises, time shares, travel, classifieds, real estate, insurance, investing, leisure, luxury, education, entertainment and consumer goods. Additionally, we are seeing growing traffic seeking information and education around business to business goods and services such as office equipment, VOIP services, office leases, consultancy, outsourcing, component sourcing, off-site functions, and hiring. If you look at the traffic patterns of the web you will see sharp spikes in usage M-F 9-5. Consumer internet usage behaviors in the home and at work are melding into one.

With massive new internet usage patterns and category expansion, and low barriers to entry for individuals to participate as market intermediaries, the past two years has seen a rapid overheating of the market. As each new internet marketing tool is becoming more understood, they are also becoming rapidly “overbought”. The keyword market today is more than fully priced and each day more arbitrage is being wrung out of the process. Lead arbitrage players have found commercial keyword prices skyrocket in price as a result.

The rapid developments in this market have created great new opportunities. As for instance commercial keyword price increases takes lead generation out of the hands of the amateur arbitrage players, it has driven marketing budgets seeking qualified customers to reach out to professional, scale providers with entirely new, more sophisticated processes.

From the point of view of a marketer seeking customers online, the choices today is to either a) buy traffic to their own site and develop core expertise in refining it into actionable traffic, or b) contract with a small, unsophisticated shops without adequate controls on their processes to ensure a consistent source of leads. These shops are the same shops that rely on email spam, promotional ads (“win an ipod Nano by giving us your name”) and other even less sophisticated methods that rely solely on the low cost factor of the web. In short, very few have gone out as both the customer advocate (a valuable service consumers enjoy) and yet have the quality, professionalism, reporting and scale to service large marketing budgets. As an example, a large company I know well is now calling every one of its online leads to make sure they really exist and are interested in the product or service as indicated. Today there is no way for an online marketer to contract with a vendor to affect a desired outcome. For example, few lead generation outfits have the capability to help Countrywide switch their efforts from general mortgage leads nationwide to only credit scores of 600 or better in the Seattle area, or to help Ford identify customers for Ford products in Phoenix. They have neither the scale nor reporting nor policy management to affect such an outcome. That is a reflection of the state of the market today.

There are some very clear examples of what the future will hold. Zillow, the popular real estate voyeur site, is nothing more than a sophisticated customer identification engine which provides a valuable service to the consumer in hopes of passing them on while they are in the decision process. Lending Tree (”when lenders compete you win”) also provides an application like workflow processing value to consumers, sparing consumers the laborious vendor selection process, and instead quoting and reporting on their behalf. Lowermybills.com (purchased by Experien for $300MM) provides a similar value to consumers by asking them for their monthly bills and vendors and then tries to quote them a lower payment for similar services. Their main business is lead generation for mortgages, yet they provide an application like process to make your life better. These 3 companies point the way towards what customer identification across many verticals will look like in the next 36 months.

Out of these market developments, I believe, exists venture scale opportunities, namely the opportunity to build businesses that have the ability to become a high scale customer identification network and a correspondingly highly efficient monetizer of online customer interest both as a principal, and as an agent for the less professionalized “lead gen” player. The ability to monetize leads coupled with a fair affiliate program would mean a more efficient marketplace and a scale provider where thousands of smaller industry companies could go to monetize their “lead gen” traffic. This is where Google and Yahoo/Overture get most of their “traffic” today — and this was the model that Overture pioneered.

“Online Customer Identification” (OCI) is the future of today’s “lead gen.” It is about scale and professionalism and it is a big market very much differentiated from the current keyword (click) market. Importantly, Google and Yahoo and others have shown that the best online companies will provide real value propositions to both end consumers and to marketers. Today, in customer identification, neither constituent is being served.

This entry was posted on Wednesday, April 11th, 2007 at 7:54 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.