There are several complaints often lobbied against the performance marketing sector. While not necessarily a complaint, our sector does tend to get caught in “invented here syndrome.” For example, if this is the only world you’ve known, you might easily think that the idea of performance-based marketing is unique to the internet. You might also think that people didn’t buy other media on an arbitrage basis, like radio or TV. Both assumptions turn out to be false. The largest buyer of performance based TV buys more than the largest performance based marketing company does in equivalent media purchase power through its affiliates. The world of offline performance marketing encompasses both products and services. Unlike the online world, though, it’s the cost per sale products that command the largest piece of the media spend. Service-based offerings, such as tax help, are only just picking up steam.
The fact that cost per sale does so well offline but not online in a performance marketing basis is a big reason why the top offers on the networks aren’t the same top offers on the airwaves. The direct response television guys are the real marketers. It costs significantly more to not only test television media but to produce the commercial. Similar to the internet space, they are sometimes too good at what they do. The reputation of infomercial products historically was one of absolute junk. If you had to decide between Colon Cleanse 2000 and the HD sunglasses, you might find yourself actually going for the pills. That’s the shared dilemma between our direct response industries – the challenge to make a product with enough quality to justify the price, but a low enough cost to make a margin on the media.
Almost all performance marketing companies have run into that challenge. Even if the product is lead and not sale based, the challenge is the same. How do you achieve a high enough conversion rate to afford a media spend? And, without a physical product, how do you provide a useful enough consumer proposition and still make money? That’s perhaps the biggest knock against our industry, and as we see, it’s not limited to our industry but to almost any that must rely on direct response for its revenue and growth. That same issue is also mentioned, as well as the general reliance on spending money to make money, as a reason why many performance marketing companies have a hard time exiting. We’ve seen some consolidation in the sector, but the way that you make money generally is by being a lean, mean, cash generating machine. The path to financial success isn’t, if you build it, someone will buy it.
Looking at the exit landscape and listening to certain investors, you could easily form a slightly negative view of the space. You could start to think that we must rush to offer incomparable value. As we learned from one of the most successful people we know, certainly in terms of his own exit, that assumption is worth reviewing. Adding value definitely can make money, but some of the most successful businesses aren’t necessarily those that offer the greatest amount of value. A handful have experienced exits, but they have really struggled to make money. We hate to name names, so let’s just think about a certain real estate site, which has completely disrupted how people look for homes. Before this site, people had a hard time figuring out what their home was worth, and it required a real estate agent in order to view available homes. It was and is one of the most useful and innovative sites out there. The problem? Even before the market crash, the site was not profitable, and despite having revenue growth, it isn’t the type of doubling and tripling year over year that other “hot” properties have.
The financial world brings us several examples of companies offering unbelievable consumer value, all for free. One of the best known sites in that space was purchased not long ago for a pretty healthy amount, but the revenue story was something different. The $100+ million dollar purchase price was an almost bubble like multiple of the companies revenue. What’s perhaps disconcerting about that sale is that this was the leader in a field that had visibility into billions of dollars of consumer transactions. Perhaps by that standard, it was a steal. Regardless, you would hope that the market leader in a large market would both be worth more and be able to make more. That’s what keeps so many people from trying to offer too much value. It would be one thing if value were a pre-requisite to making money. It’s not, as we know, but those offering world class value aren’t necessarily making world class returns. That keeps us stuck in a spot of marginal value.
It’s one thing to have a moral sense of what is good and doing only what is good, but we can’t rely on that moral obligation to guide everyone. That the high value companies haven’t had the proportionate returns is not a knock against value. It certainly doesn’t help motivate others, but it shouldn’t be taken to mean you won’t make money. It’s very possible that these sites are simply too far ahead. It’s like many of the broader web based services today whose earlier iterations during the bubble failed because costs were too high. So it could be here with monetization. The costs are fine, but the revenue models haven’t advanced enough to properly reward the businesses who exceed users’ expectations and offer them true value without coercing them into revenue generating opportunities. There is a point after which offering value doesn’t yield more money. Finding that optimal balance is the goal for now, which is not entirely bad news for the performance marketing space.
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