Silence Dogood, the namesake of the slightly prudish widow of Poor Richard's Almanac. Reformed Internet lead buyer and consumer grinder. Inclined now to focus on how to turn Internet client advocacy into increased conversions and long-term production. You might also catch me engaged in rumor mongering or needling the less intelligent.
Why the Lead Exchange Model Can’t Work
There have been some interesting posts lately about the lead exchange model. I felt it might be an entertaining topic, so entertaining that it may even be worth coming out from my long slumber to make another contribution. Firstly, I’ll try and give a little color to the background of the lead exchange as I understand it. Ultimately, there have only ever been a few lead exchanges in existence.
There is one relatively new attempt. The first lead exchange remains solvent, but has required numerous rounds of funding to do so. The second lead exchange which is now out of business, was started with a great deal of capital (from what I understand). Lewis Ranieri, who is now infamous in this industry as the father of the CDO (Collateralized Debt Obligation), contributed millions of his own funds on top of additional venture capital money that was raised to help start this company. Yet, today the company doesn’t exist. Why is one operating after raising a Series E round of funding while the other is insolvent? There are a number of contributing factors, but ultimately it is because the lead exchange model can’t work. There are two reasons why the model can’t work: the margins are too thin and the market does not need an exchange to operate. I will elaborate.The lead exchange model is different from the traditional lead model in that there is no marketing. The lead exchange is simply an efficient conduit between a lead buyer and a lead generator. They do not purchase the lead, or purchase marketing that generates a lead, mark it up for margin and re-sell it. They simply operate as the device that matches prospective lead buyers with lead generators whose leads fit the buyer’s filters. For revenue, they take a percentage of the price that the lead captures, typically in the 10%-20% range. For example, let’s say a lead is bought by 4 buyers for $20 each. That lead would be worth $80 ($20 x 4). The exchange would keep, (I am guessing based on information I have come to understand) about 20% of that, or $16 and the company that originated the lead would keep the other $64. So there you have it, the key flaw. Margins are too thin. With gross margins of approximately 15% there is not a tremendous amount of room for things like payroll, taxes, infrastructure, technology, etc. unless there is an exceptionally high volume of leads being passed through the machine. Its value is derived via efficiency. Think of Costco. The margins on the goods that you buy from Costco are paper-thin. But because Costco moves a very high volume of these goods they are able to make money, (also there are the membership fees which are where Costco really makes its money, but I digress…).
In my opinion, the lead exchanges have not really been able to make significant traction in products beyond the financial arena. And furthermore, with the contraction that the mortgage industry has seen, probably 40-50% smaller today than it was two years ago, the arena has actually gotten altogether smaller. So with the contraction of the financial sector coupled with the inability for the lead model to gain significant traction in other verticals, there simply isn’t a big enough market to feed a low margin, high volume business model. The second reason why the exchange model can’t work is because the market doesn’t need an exchange to operate.
Think of an example of where an exchange does work; the most obvious one being the stock market. If we as purchasers of stock could go directly to Google to buy shares of the company, it would make the NYSE or NASDAQ irrelevant. But we can’t purchase stocks in this way. If we want to buy shares of stock, we only can do so via the exchange platform where the company has chosen to list their stock. Likewise, if the only way to buy a lead from a LendingTree or a LowerMyBills were from an exchange, then the exchange would be relevant. But since you, the lead buyer, can go directly to any number of viable and legitimate lead sellers directly, there really is no need for the exchange. The exchange is merely another means for acquiring leads and not a necessary means. With its razor thin margins, unless it is a necessary means for acquisition, I just don’t see it gaining the prominence needed - especially in the current market conditions - to be a sustainable business model.So that is my opinion.
I am sure there are many out there may feel differently. I look forward to your responses and any of the dialogue that may result. For what it is worth, I do believe that the concept is about as innovative as anything this industry has seen. Had the model been born in 2001 rather than 2005, then it very easily could have been different than it is now. Ultimately, as I have discussed, I think there are a couple of fatal flaws that have prevented the model from gaining the traction needed to be successful. What are your thoughts?…
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