Google CPA will crunch lead gen arbitrageurs margins further March 21, 2007
Posted by jeremyliew in advertising, Consumer internet, Lead gen, Search, start-up, startups.trackback
Today’s release of Google’s Cost-Per-Action (CPA) beta has generated a lot of attention. Most are focusing on the impact on affiliate networks such as Commission Junction or Link Share as the test is currently confined to Adsense ads that show up on the Google Publisher Network.
I’m waiting for the other shoe to drop. The next logical step is to have these CPA ads show up as Adwords next to Google’s search results.
This presents a direct and present threat to many lead gen businesses, especially those that rely on CPC to CPA arbitrage as their business. I posted on the future of lead gen in January, where I noted that, simplifying substantially, lead gen comprises three processes:
1. Acquiring traffic (e.g. from paid search, organic search, brand advertising, banner advertising, distribution deals etc).
2. Converting traffic to leads through a form-fill process
3. Finding the highest value for a lead among multiple buyers (ie having a network of advertisers and knowing who placed what value on each lead)
Google’s current beta will essentially eliminate the arbitrage opportunities in part one of this value chain. Companies driving the majority of their traffic from organic search and (long term) distribution deals will be less affected, as will those who add value to the process by qualifying users and directing them to the best matched vendors as leads. But those whose core competencies are in clever media buying will be pressured because a CPA model shifts the risk out of buying CPC and CPM media and converting to lead forms.
There are a large number of lead gen companies that have grown to over $100m in revenue. These have grown to their current size by being well managed, and building multiple sources of traffic and an efficient mechanism for matching leads to their highest value.
Smaller “mom and pop” lead gen shops that depending on buying traffic through banner advertising and CPC advertising to landing pages and selling these leads to a small network of buyers will find their margins under increasing pressure if their clients can disintermediate them through Google’s new products.
UPDATE: Some very insightful responses posted in comments that I will attempt to summarize as “you’re assuming more efficiency exists than actually does, thats why this will still create a lot of value”. Its a fair point. If you read this in RSS, its worth reading the comments.
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One thing to note is that depending on the vertical, some lead gen companies will still thrive even when Google PPA/CPA hits the SERP. Why? Because managing huge campaigns is just too time consuming, so there will continue to be a market for lead gen…and the affiliate arbritrageurs that follow.
If Google ever really focused on building a best-in-class Shopping Engine with CPA pricing, Shopping.com, PriceGrabber, et. all would go out of business. Same holds for many other verticals (e.g. Lending). The infrastructure (pixel-tracking, etc.) requirements would definitely present complications. But, Google completely owns the initial (and all-important) consumer touch point in almost every vertical based on its general search presence. With all of Google’s engineering resources, it could definitely subsume all of the “value creation” that takes place post the consumer’s initial search query.
Arbitrage by definition has a finite opportunity window.
I see an opening for this program to work in some underserved markets and to actually create some opportunities for abritrage. Affiliate marketing and lead generation is controlled by a small number of experts that know how to buy online media. Google’s automated system could make affiliate marketing ubiquitous.
The big – usually overlooked – revolution that CPC has brought is to put the power of buying online media into the hands of the small business owner. But, there are a lot of small businesses that have no clue how to make affiliate-marketing/lead generation work for them. They also don’t have the cash [flow] it takes to invest in getting a CPA program up and running with a company like cj or linkshare. Yes, I know it’s only a few $k, but that’s a big barrier for a small business. Even if they do have the $ to invest, they probably have to hire someone full time to sit and optimize creative and recruit affiliates. I know that cj and linkshare have a pool of affilate publishers, but the publishers have to be persuaded to try it. Even if a small business can afford to hire someone to manage their program and invest to get it up and running through a network, it’s also not easy to find an affiliate marketer that is good at making it all work. It’s certainly harder than hiring another saleserson to call on accounts. And that’s the decision that most small business owners have to weigh: Where do I spend my incremental resources to bring me more ROI. Affiliate networks are not the usual answer. CPC has certainly proved a viable option, though. I would argue it isn’t because of the fact they are only paying for clicks and reducing risk. It’s because they can manage it themselves OR they can hire a local firm with some simple writing and math skills to manage it for them. You can’t do that with affiliate marketing.
There’s a big barrier to entry for CPA. Google could eliminate that.
That said, these same small businesses have very high value transactions. I have some clients that can make a $50,000 sale to a small business owner w/ a 70% margin. Wouldn’t it make sense for them to pay $500/lead if they knew that 1/20 would convert? Yes. Wouldn’t it make sense for a blogger to run a link for that? Especially if they knew they could reach the audience. Now. What if that didn’t require any up front investment, little creative work and only a few clicks for the publisher to run it? I’d say that google COULD significantly lower the barrier for small businesses to do affiliate advertising.
Of course, I haven’t gotten in yet to the program. Waiting for my invite. There’s a lot of factors, of course. I am sure they’ll make it easy and automated to use for the advertiser. The question will be: how easy do they make it for publisher to manage risk? And how many publishers will take on CPA deals?
With conversion data, I don’t see why Google wouldn’t eventually manage the risk, instead of placing the burder on publishers. They’ll know which sites send visitors that convert and they’ll know the rate they convert and the amount of revenue it generates for them and the publisher. It wouldn’t take much for them to compare an eCPM from different CPA, CPC and CPM offers and choose the right ad to run to maximize conversions and profit for them and the publisher.
I am looking forward to testing this for my company to drive event registrations for our clients’ events. It’s been impossible for us to leverage affiliate neteworks for events because we generally only have a 2 month window to execute on an ad campaign for an event. But, the margin is certainly there. Most public events are paid-for by sponsorship dollars. Registration dollars are usually pure profit. So, there’s lots of margin to share if the ad placement can be automated and optimized quickly.
Jeremy, I have to disagree with you on this one. You’re assuming an efficiency in the market that does not (yet) exist. Most companies have very little understanding of the value of an online lead, and even less understanding of the value of an online lead generated by a particular keyword on a particular search engine.
“Clever” companies like LowerMyBills, Quinstreet, etc still have an advantage over individual companies simply because they are experts at understanding the true value of each and every online media placement they buy.
These companies also have three other advantages over their clients: 1) they multi-lead each lead, minimizing risk; 2) they upsell and cross-sell additional products, increasing monetization; 3) they are laser-focused on optimizing conversion rate for their lead forms.
As a result, if an online lead is worth on average $100 to Countrywide, LowerMyBills can get $150 out of the same lead simply by distributing the risk to 4 lenders (charge them, say $30, each), upselling the user on another offer ($30), and simply driving a higher conversion rate. The end result is that even in a CPA world, lead gen companies can still pay more per lead than the companies they represent.
Moreover, in a CPA world, there may still be an element of bidding. Afterall, if I offer Google a $175 CPA for the word “palo alto mortgage refinancing” and Countrywide offers a generic CPA of $100 across the board (because they don’t really know the value of leads from one keyword versus another), I can still afford to play the game as a lead gen company.
It should be noted that there are already CPA networks online, such as Advertising.com, MSN Direct Response, etc. To my knowledge, few if any direct companies have been able to break into these networks, simply because the lead gen companies just out-monetize them.
The scarier scenario for lead gen companies would be if Google made a concerted effort to combine CPA, Google analytics, and intense training to customers on how to truly measure the value of online advertising.
But, truth be told, this would be quite a risky move for Google, simply because Google – like lead gen companies – also benefits greatly from advertiser inefficiency. After all, if Countrywide actually had enough transparency to know that they should reduce their CPCs on certain keywords by 75% and increase their CPAs on others by 20%, I guarantee you that the end result would be lower monetization for Google. Google and lead gen companies both make a lot of their money by capitalizing on the lack of knowledge of their customers.
Ultimately, I think the Google CPA foray has much greater implications for Commission Junction, Linkshare, and other affiliate-hubs.
BTW, my sage wisdom on the topic of Google CPA and lead gen can be found here if you are interested: http://blogation.blogspot.com/2006/06/googles-foray-into-cost-per-action-cpa.html
Working on the publisher side, CPA deals are not preferred because it is too dependent on (a) the creative, (b) correct target audience, and (c) timing – reader must need that thing at that moment. From my experience they have been very poor performers. Throw in the mix that Google is pushing it through their network which is a broad stroke as compared to a media buyer, and you’ve created a lose-lose proposition for both the publisher and advertiser – even with their ‘highest converting ads to keywords’ algorithm.
That said, I agree with Jonathan that CPA is best served in a product search/research scenario for Googles purposes; AND, it would also work if they just create a seperate product from their current AdSense model and compete directly with commission junction, et al. CPA could be very beneficial and much more lucrative to everyone if applied correctly. There is no business model that effectively uses CPA and Google hasn’t hit the right combination either.
This will affect B2B a lot more than the consumer side. Sucks to be B2B lead gen business without defensible media assets (like Buyerzone). That said, the following thoughts apply to the consumer topics (probably 95% fo the arbitrage market).
Until the Google CPA program is phased into Google Search, it’s not going to be that big of a deal. There is very little gold to be mined on the Content Network.
The other thing to think about is that Quality Score already did in quite a bit of the arbitraging margin on Google. Most arbitrage opportunity now remains on Yahoo and MSN paid search.
I am interested in both sides of the equation for CPA. I am publishing a travel/location site (www.grapheety.com) where our revenue comes from affiliate networks, as well as google adsense.
That being said, I also advertise on multiple sites including Google Adaware, and Yahoo’s program. I think that Google has a long way to go, as well as Yahoo. As a publisher looking for advertising, I don’t have all day to sit around and guess keywords, I want people interested in Travel. I had 30-keywords with $.20 bids about a month ago. 3 Days after that they were all inactive. I raised the bids. 3 days after that inactive. Raised again… etc. Now each of my words they want minimum bids of $10.00!
I am not selling products on my site, so no user is worth $10.00, so I had to dump Google. Yahoo is currently working 10x as well with $.30 bids on cpc.
Also, interestingly, if Google is charging $10.00 for bids minimum, then why are most of my clicks only earning $.12 ? Is google taking a $9.88 cut out of the $10.00?
This leaves enormous room for price competition. I think that over time people will force this information public and competition will benefit the publisher, as well as the advertiser.
With CPA, I have the same prejudice that Google is going to take too much of a cut.
Great blog; great comments. Good to have this resource.
I will echo David R’s comments here. What most small- to mid-size lead gen firms don’t understand is: 1) the impact of service rate 2) that not all leads are created equal (leads are really segmented in two ways: 1) profile (cali refi lead trumping the economics of idaho purchase in mtg for example) and 2) transactional (propensity to convert downstream — this is why you often see the question on many “forms” — “Describe where you are in the process? Values: “Just browsing” “Will purchase in the next 3 months” “Ready to purchase today” for eample)
“Service rate”–apologies for those that are quite familiar with the term–is the ability to assign an advertiser/buyer to a customer who has completed the entire funnel process. Due to inefficient funnels and incorrect market messages, less “clever” lead gen companies will generate conversion, pay Google on that conversion, yet not be able to monetize the lead.
Overall, smaller shops that don’t do a good job of understanding profiles, improving their conversion, or cross selling will hurt. Bigger shops that deal in more commoditized markets like edu and auto finance where there is little profile information to segment or massage will also be negatively impacted.
Basically you’re not asking inefficient shops to add internal resources to improve funnel conversion to reduce their upfront risk…if Google solves this correctly. Are there that many funnel/online supply chain experts out there now? No. Will small- to mid-size shops be able to recruit them? Not sure.
One area of opportunity I believe this vastly opens–again if it works–are pseudo content firms that can add value to “browsers” through information, advise, etc. Again, if this works, “browsing keywords” (for example “Las Vegas Hotel Reviews” vs. “Las Vegas hotels” –check the price–) will remain high in volume but move down in effective CPM. This presents an opportunity for content shops to gain a user at a cheaper price and look to convert them downstream — again, through information/advise (see Trulia) or list management.
[…] Google CPA will crunch lead gen arbitrageurs margins further « Lightspeed Venture Partners Blog (tags: ppc arbitrage cpa google affiliate.marketing) […]
Google purports to be concerned about the ‘quality’ of advertiser sites recently and the impact on its users.
This project runs counter to that in my view. It wont encourage site owners to improve their site, the purchase process, availability, usability and accessibility if they are only paying for completed leads or sales.
Gavin – Good keyword relevant landing pages that aren’t obvious affiliate/arbitrage plays will bring your CPC down. It’s Google “Quality Score” that is affecting your bid prices. They try to price you out of the market until you increase the quality of your pages/keywords. Not very many people actually pay $10/click – which is why you’re only making .12.
See: http://adwords.google.com/support/bin/answer.py?answer=49174
hey,
good read a little over my head but still good, I have jsut gotten PPC formula home study course, whats ur opinion of this?good for learning CPA?
GoogleAssassin
Affiliate marketing is IMO the #1 way to make a living online. But you have to treat it as you would any business. It takes hard work and long hours. Nothing will come overnight. Probably the key thing you have to do is find your niche and go with it. After that you should be on your way. Nothing feels better than when you make that first $1.00 online. Esp when you have failed to make a penny in the past.
Google’s CPAs don’t work .. I think their network of offers doesn’t even exist anymore.
At least in my Adsense account it doesn’t show anymore. Anyway, established CPA networks is the way to go. I love having support (affiliate manager). Google’s support .. is very … googlish ..
Very interesting post! I wasn’t in the IM arena in ’07, so I’m just now hearing about this. Did Google abandon this quest? Or is it still in beta?
~Chad
Founder, NicheRichMarketing.com
Good post and interesting comments but as this was posted in 2007 its interesting to see what has actually happened since. CPA has sky rocketed. I believe you should do a follow up article.
I know this post is older but I’m wondering if Google actually ever launched a CPA program. CPA has become huge over the last year or so and when I think of CPA networks, I don’t think of Google. What ever happened with that?
I`m wondering the same Matt … And thanks for the post
I find this Post very interesting and what’s more it is a kind of inspiration for me, In my opinion it saves their time and it’s seems to be more interesting.
Thanks
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