The Rise of Lead Generation Business Models

The top search results have become more and more dominated by companies that appear to offer a wide range of products and services. In fact a lot of these are simply middlemen selling on leads to other providers. So called Lead Generation or Drop Shipping businesses. But what's behind this trend?

One of the challenges of advertising on Google over the last 10 years, especially in competitive markets, is the fact that in many markets the number of search phrases used by potential customers are quite limited. This is due in part to Google's auto-suggestion tool introduced in 2004 and set as a default search option for all users in 2008.

The side effect of this tool is a lack of diversity of search phrases - the so called "the long tail of search". In the past when Google's search box was free format the long tail was... longer!

In many markets this has caused two things:
1. Almost every business HAS to target the same set of basic search phrases irrespective of the searchers intent.
2. Click prices for these phrases have increased as more an more advertisers bid for the same words.

What a company is willing to pay for a phrase depends primarily on how how well that company can convert it into a piece of profitable business. Those companies that can satisfy a searcher and make a few quid will pay more and get higher conversion rates.  Moreover, if the conditions are right Google will also reward such companies with lower costs per click, even if their competitors are paying more to be in a lower position.

Lead generation businesses have been quick to take advantage of this problem as Google (quite naturally) put these companies at the top of the results table as they are more likely to generate a sale and therefore are more willing to pay a higher cost per click.

Confused? A basic example of the problem might help to understand what is going on. Let's say I am trying to sell car insurance. I'm an insurer who specialises in Mercedes classic car insurance to older men and I have the best rates in the country for that profile.  I'm bidding on the phrase "mercedes classic car insurance" and I'm doing OK on that phrase because I convert it well. However, my market is much much bigger than the people typing in that phrase. Sadly most people simply type in "classic car insurance" or indeed "car insurance", so they never find me. Why? because the top results for those phrases are usually dominated by aggregators such as "Confused.com", "Compare the market" etc etc. So as a company I am now forced to pay to be on those sites rather than try to compete against them because they can afford to pay more per click for those phrases and I can never get my Ad to show.

It gets worse too. Because although I do well with my "mercedes classic car insurance" phrase, because it contains the phrase "car insurance" I'm also outbid on that phrase too, further reducing my exposure to that market. The aggregator always wins because of Google's business model.

I am oversimplifying here and of course Google try always to put up the most relevant ad, but the fact is that aggregators and lead generation businesses are becoming more and more dominant and it's spreading down to smaller markets too with the rise of businesses like Bark.com.