Trends Report – Anatomy of a Lead Gen Industry

This week’s Digital Thoughts uses a wide brush to cover the evolution and segmentation of arbitrage activity online. In it we touch upon one of the major arbitrage activities, lead generation. It’s an industry that, regardless of how they buy their media, be it on a CPA, CPC, or CPM model, must always look at the performance of the traffic with respect to how the leads themselves convert. It’s easy to assume that buying on CPA solves the lead generation companies’ issues, but they could easily end up paying $40 when the leads from that source can be sold for only $35. Rather than the horizontal approach of this week’s Digital Thoughts, in this week’s Trends, we take focus solely on lead generation by first inspecting one of the oldest lead generation verticals online, new car purchase leads. Ultimately though, we look for not just how that vertical works but for information and themes consistent across and applicable to all lead generation activity online. Join us.

Given the current incentives in the auto market to buy a new car, many people will be driven online to research different models. If they do not have a site in mind, such as Cars.com, Edmunds, or KBB, chances are they will, through various search engines, wind up on a site run by Automotive.com, BuyingAdvice.com, or CarWorks.com. There, users will have the opportunity to learn more about the car they want. They will even be able to see, among other things, what the dealer’s invoice price is along with tips on successful negotiation. The ultimate goal of these sites, though, is not education but lead generation.

So what is a new car lead worth? Dealers have a rule of thumb number that it should cost about $50 to get somebody into the showroom. Without giving away all pricing information, a dealer network will pay some fraction of that for a lead. That this network exists, so much so that often even the most remote local dealers have heard of online lead generation is thanks to the heavy lifting done by the major dealer networks who introduced the idea and proved the value of lead generation to the dealers. That the leads now come from the Internet is only a detail. It is the dealer networks that have sales people in the fields visiting and calling upon dealers to sell them leads and the software for managing and tracking lead performance. The market is now advancing to a point, too, that some of the larger dealerships, generally those that do high volume sales and/or have multiple branches, now work directly with the lead generators as opposed to going through the dealer networks.

Now that we know how the market works, what can it tell us about lead generation as a whole? Fortunately, quite a bit, and here is our aggregate list of principles.
· There are a finite number of big buyers.
· The best and most sophisticated buyers will track down to the source the exact close rate and use that data to determine lead price. It’s where all buyers will move to over time. 
· Expect that all parties in the industry will overlap at some point. “Frienemies” as Vantage Media’s Mark DiPaola calls them are almost inevitable. The guy buying your leads will also be the one bidding against you in Google.
· Lead buyers will want exclusive leads, but of course some behind the scenes double selling occurs.
· Traffic influences quality. No vertical will suddenly find co-reg leads more valuable than search, and those that shove bad data in will see the effects.
· Complex segments will see segmentation, i.e. when a lot of pieces and interactions are involved in getting a lead to close, companies will become experts in certain areas. Some will be experts in aggregating lead buyers while others might become experts in traffic generation
· After conquering one piece of the puzzle, don’t expect a company to stay there. They will look for other areas of the chain to cover. University of Phoenix doesn’t currently buy media directly, but LowerMyBills.com does. They are not as far off as you think.
· An uneducated consumer earns more money for the buyer – true transparency will produce a more efficient market in the long run but hurts lead price until the point of transparency and data liquidity is reached.
· High volume, low quality is online fast food. It doesn’t mean it’s a bad business but you need to price accordingly. McDonalds charges $.99 for a burger for a reason.
· Creating the market is the hardest part, but those that do, often can erect a barrier to entry that will delay others for a while.
· The market maker will win in the end. Creating walls only works in the beginning to keep people out, but limits expansion. The quicker and better one is in facilitating the exchange of information, the more money they will make in the long run.

The new car lead industry by itself is a fascinating one and is one piece of the automotive lead industry online, an area that also covers used car, extended warranty, insurance, financing, and even inspection. It works because of lead value (conversion cost * conversion rate), demand, data consistency, and coverage. The high ticket nature of buying a car means the value of each potential prospect is high. The almost universal and continuous cyclical nature of users buying new cars means that at any given point there are enough people buying. A Chevy Corvette is the same no matter where you buy it. The lead buyers might want slightly different data and call their fields by different names, but they all sell the same product. And finally, everyone buys cars not just a narrow band of people in a small geographic region. Find an area that satisfies the lead value, demand, data consistency, and coverage formula, and you have the makings of a great business. More than you might have imagined already exist. The even better news is that so many have yet to be brought online. And what a fun time that will be.