The Economics of Vertical Lead Generation Sites

An oft-cited criticism of vertical lead generation sites (“VLGS”)  is that end-users have the ability to request information on multiple concepts.  This, so the argument runs, dilutes the attention making it more difficult for any given lead-desiring concept (“Concept”) to convince the end-user to pick its product over the others for which information was requested.  It is hard to argue that such is not the case.  For if choice is limited then limited choices will obviously be made.  The problem with the argument is not in its probity, it is in its mistaken simplicity and its lack of grounding in reality.  A VLGS is nothing more than online information directory.  Since the scope and reach of a directory is a function of the amount of revenue the directory can generate, it is unrealistic to expect that a directory limit the interest in, and therefore the information provided by, any one Concept. 

A VLGS, like a directory, cannot operate efficiently if the number of Concepts for which information can be requested is limited.  Both VLGS and directories are dependant upon generating a deep interest across a broad swath of Concepts.  Limiting the number of inquiries that can be made by one end-user degrades the efficiency of the VLGS business model, and will eventually limit the efficacy of the model.  No VLGS, nor any business for that matter, can limit its operational efficiency without some form of commensurate revenue increase as a counter-weight and expect to stay in business.  To understand why this is the case one must first understand the economic and operational principles behind a VLGS. 

A VLGS aggregates traffic for the use and benefit of the paying Concepts which have paid to be listed on the site and/or are paying for leads that are generated by the site.  This is primarily accomplished by directing keyword search results toward a single website.  One of the advantages of a VLGS is its directory style business model, to wit: it can offset the relatively high cost of purchasing a unit of advertising by diffusing the interest in the site across many paying Concepts.  It is this operational efficiency that is degraded when a VLGS limits the interest in paying Concepts. 

But the vertical lead generation model is equally as beneficial to the paying Concept as it is to the VLGS because of the time and cost associated with trying to drive traffic in increasingly very competitive marketplaces.  The available SERPs on the major search engines is not growing, and in fact can be said to have achieved a certain amount of stasis in many categories.  Few are the times when a new website can achieve top level organic placement, let alone top level placement on enough keywords to drive a high volume of traffic. Additionally, the cost of paid traffic continues to increase. 

Moreover, one of the realities of online marketing is that there has been too much hype made of the “long-tail.”  For consumer driven purchases the majority of traffic is not on branded keywords or obscure keywords but rather a reactively small sub-set of keywords that drive the majority of the traffic.  For example, whereas there may be many searches on the word McDonald’s Franchise, a much smaller number of searches will be entered for MacD’s Franchise - even if MacD’s happens to be a subsidiary of McDonald’s and/or viable competitor.  Similarly, while there may be quite a few searches on the term “food franchise” there are many fewer searches on the term “hamburger franchise.”  While there are still people searching for “hamburger franchises” the opportunity cost of spending money in the relatively slight hope that a sale will result from their search is often times outweighed by the cost of not being included in a directory.

This is where the VLGS true value add proposition is realized.  VLGS are adept at sifting through a large amount of traffic in order to provide only the most qualified of leads.  It does so, by pooling its resources to get traffic on all relevant terms, as well as terms that are not in the specific industry but are within the general theme of the action being requested.   Some of this traffic will not of a sufficient quality to warrant purchasing again i.e., the money will have been wasted.   But the purchase of the “wasted” traffic will not destroy the model precisely because the model is built on scaling a great amount of traffic purchases into leads.  Whereas an individual Concept may spend through its yearly advertising budget in a month or less were it to attempt to do this on its own and run into similar traffic difficulties, a VLGS can weather the storm and continue to produce quality leads.  Moreover, some of the traffic that would need to be purchased to produce the leads would be cost prohibitive to many Concepts in the first instance.

To understand more clearly why it is in the interest of both the Concept and the VLGA to allow for the end-user to inquire about as many Concepts as possible, it may be helpful to view the VLGA as a retail shopping mall.  The VLGS owner purchases and develops a website where it plans to advertise other company’s products in order to generate interest in said companies.  Similar to stores that choose to rent space in a mall, Concepts rent space on the VLGS.  In both instances, both Concept and storeowner are free to choose not to enter into a contract with either the VLGS or the mall owner.  People go to a mall exactly because there are many stores to choose from and that is exactly what is attractive to the consumer – the ability to go to one destination and investigate the quality, type and price of many different products with the opportunity to ultimately purchase one or more items.  Each shop owner could find its own retail space and hope that its location is sufficient to garner enough traffic to stay in business.  Similarly, Concepts can advertise only their product on the Internet through either SEO and/or SEM efforts.  But by doing so the Concept forgoes the chance to be found by consumers who might not have been interested or been able to find its product initially. 

To analogize back to the mall example, people may not have known that they were going to buy a shirt from Store A when they decided to go shopping; in fact, they may have set-out to buy a pair of shoes at Store B.  But upon seeing the shirt at Store A realized that they would rather have the shoes instead.  This transaction likely would not have occurred had it not been for the dynamics of the retail mall.    Of course, the owner of Store A will complain that it lost a sale precisely because of the retail mall – or more precisely because Store B and by extension, the owner of the mall and his decision to rent to Store B.  What this analysis fails to understand is that but for the mall, Store A might never have had the opportunity for the sale in the first instance.  This would be the case if Store A was a less well capitalized company and/or one that sold products that were not as well known such that being in the mall was the only way Store A could have remained either profitable or the way that it maintained its greatest profitability.  Whereas both Store A and Store B would like to have the event of the sale without any competition from the other, the only reason for the sale was competition that resulted from the dynamics of the retail mall.  Neither the mall owner or Store A or Store B could remain in business if Store A got an “exclusive” right to sell its wares in the retail mall environment. 

Similarly, a VLGS must allow for further the options available for the end-user as that is the way that the most amount of traffic is driven to the site.  This in turn drives the most interest to the individual Concepts advertised on the sites.  Whether an individual Concept can affect a sale is dependent on its sales efforts and the attractiveness of the product.  That an individual Concept may ultimately lose a sale to another Concept is simply the “cost” of doing business.   If a Concept can purchase a significant amount of traffic to supply sales leads needs, and get a ROI that is greater than the VLGS then it should do so.  But for most that is simply not the case.  As in the case of the storeowner who is more profitable being a tenant of the retail mall as opposed to a stand-alone retail location, the ROI on leads purchased through a VLGS is greater for the vast majority of Concepts because of the time, cost, and complexity of generating leads on the Internet.