This is cross posted from the Energy Circle PRO Blog.
Everyone wants more and better leads, and a lot of people have been asking me recently about Lead Generation Services, particularly since I open sourced the Cost per Acquisition Model for Home Performance Businesses.
Lead gen companies, sometimes called lead aggregators, are generally marketing firms that deploy a range of tactics to gather leads that they then sell to contractors. Typically, you can buy an exclusive lead for a higher price, like $50, and a non-exclusive lead for $15-25. Non exclusive means the lead gets sold to multiple contractors who then duke it out to win the job.
Service Magic is the grandaddy of lead generation in the local contracting space.
Lead generation companies make money on the spread between what it costs them to acquire the lead and what they sell it for. Typically marketing is their major expense item. Angie’s List, though a slightly different business model (based on user subscriptions) went public last year and had to expose that their marketing expenses were almost as much as their revenue. Service Magic, as all of you focused on improving your Google search results know, is extremely aggressive with pay per click ads, dominating so many of the key home performance search terms (energy audit, insulation contractor, etc.)
The key to making lead gen work for you is all about how well you convert purchased leads to retrofits or audits. For a $500 audit with a 20% margin, you need to have an exceptionally high conversion rate to make this a viable marketing channel. If you have to buy 6 leads at $15 to convert one, you’ve devoured your entire margin. This is obviously very different if your measure is against a $7500 retrofit job, but so are the conversion economics. What I’m hearing is that the conversion rate to a quote is around 20% and the conversion from quote to job is similar. In the model I built, cost per acquisition for lead generation services exceeds $1500. Tough math unless your jobs are really big.
Of course the Service Magic’s of the world don’t want to admit this, but if you think about it it only makes sense that a lead that got to you indirectly is of lower quality. What’s better--a lead where an internet searcher clicked on a generic ad, filled out a form on a third party site promising "low bids", and gets a call from you? Or one where an internet searcher found your company, looked at your website, read a review, read your About Us page, and decided to call you specifically? What’s even more important is to understand the messaging by which the lead aggregator is capturing leads. Most of the time, Service Magic’s key message is about offering “free bids.” So, right from the get go, an expectation is set that this is about lowest price. You haven’t had a chance to even talk to this prospect yet, and already they’re predisposed to be making a selection based on lowest price.
It’s important to understand each company’s approach to how they acquire leads to be able to assess their quality. Service Magic casts a very broad net using popular terms like “energy audit” and are very aggressively bidding up their position to get clicks. What I hear from a lot of people is that leads from SM typically don’t really know what an audit is, and more often than not aren’t aware of the whole house concept. This isn’t really surprising. Sites like Service Magic or Yellowbook treat pay per click advertising as an inherently high volume, low conversion game, and it works when you ignore lead quality and resell them many times over. Investing the $10-$30 per lead you pay those sites into your own PPC lead generationefforts can produce leads of much higher quality at similar cost.
The lead gen companies that are closely aligned with home performance, like Energy Savvy, are a different story however. Energy Savvy’s source for leads is their excellent audit questionnaire, which is self selecting in who takes it (people very interested in home energy efficiency) and produces a lead with real data about that person’s house. That’s a good lead and most likely worth every penny. For the moment, however, ES is more focused on deploying their self audit tool to programs and not on driving customer traffic to their consumer site. So as good as these leads are, and as much as I love the team at ES, you probably shouldn't expect significant volume from them. Some newer firms are emerging that have unclear strategies, at least on the surface, for how they’re getting their leads. Capturing traffic via organic search for content typically makes for OK leads, but new websites can’t be expected to produce much volume for some time, unless they, like SM, are paying for those leads by using pay per click advertising. It takes deep pockets or lots of history to produce many leads via content driven organic traffic.
The bottom line is that I want YOU to win those searches DIRECTLY. I want your site to perform so well, and your pay per click campaign to be better, so that you beat the crap out of Service Magic. After all, they’re really just out to intercept the searches of people who are really looking for you. Then we’re producing good cost per acquisition economics that are sustainable.
If this all sounds overly negative, it’s not meant to. The beauty of Lead Gen services is you can try them one lead at a time. If you’re converting well, then rock on and keep doing it. Just be sure you’re doing the real math. Cost x conversion rate to quote x conversion rate to job = CPA. Decide for your own business model what you’re willing to pay for a job and make sure it doesn’t eat up all your margin.