There is an interesting and lively discussion taking place at LeadCritic.com. The question posed is “Why the Lead Exchange Model Can’t Work.” The premise of the original author’s denouncement of lead exchanges seems to rest on three assumptions: “paper thin margins,” circumvention, and volume. I am not certain that I believe they can’t work. I am not even sure I am convinced they aren’t working. However, I will definitely agree that they do not work optimally.

What is Good Online Lead Generation?

Most of my logic for this statement goes to the two fundamental elements I use in evaluating a “good” lead generation company:

• efficiency
• customer value (quality)

Online lead generation is inherently a high volume business. It requires scale simply to produce a marginal return. However, the barriers of entry to enter and achieve a reasonable scale is very low. So, to be an exceptional (investment grade) online lead generator you have to have something extraordinary in efficiency or customer value, which I think is very close to saying lead quality.

In theory, lead exchanges should have an advantage in both.

What Makes a Good Lead Exchange?

Exchanges should increase transparency, price discovery, and help the market achieve an equilibrium of supply and demand. These characteristics should also help the second element of a top line lead provider–customer value. Ideally, in a perfect marketplace the worst get priced out and the best are appropriately premium priced.

So, why aren’t lead exchanges wiping the market clean and possibly even struggling to survive. Here are my high-level theories:

1. Perfect Information: One of the fundamental principles of efficient marketplaces is perfect information. Advertising or lead exchanges are still largely black boxes. We harp on lead quality ad nauseam, but there is little to assure us of quality providers, methods, or efficacy. In addition, there are few controls or regulations (e.g., stock exchange) to enforce integrity in the marketplace. There is little on the order of analytics or research to support the marketplace with information (not to be obnoxious, but Lead Marketwatch is probably as close as you get). In contrast, the stock exchanges and financial markets are bursting with research reports and firms.
2. Liquidity: This is probably the biggest weakness in current models–my opinion. Highly effective marketplaces work on the theory of frictionless liquidity. Of course, this is a theory and rarely perfectly achieved in any marketplace, but lead exchanges are very far away. Current lead exchanges, at any given time, lack liquidity on the (real-time) supply or demand side of the equation on par with any other lead generation business model.
3. Customer Value: Because most lead exchanges lack item one and two, the third is probably shaky as well. Without good information and liquidity in the marketplace you have the same probability of getting a good or bad lead with a lead exchange as you would if hunted down a lead provider on your own.

Conclusions on Lead Exchanges

I have certainly highlighted some of the imperfections of the lead exchange model in achieving a true marketplace. However, don’t confuse my conclustion:

Lead exchanges are no better or worse than any other lead generation business model. Although, I do think they are more difficult to effectively create and manage.

In general, I believe online lead generation is destine to remain inefficient and less valuable than it could be because of four principles (largely on the demand side of the equation):

• Few buyers are willing to invest in efficiency
• Most sales systems are incapable of tracking and measurement
• Most lead quality assessment is subjective and measured by sales force survey
• Because of all of the above, business success is measured on a pass/fail scale

Therefore, I think it is immature to call any innovation in lead generation failed. From my vantage point, it simply seems there is little need or (financial) motivation for online lead generation to innovate.

Online Lead Generation Innovation

To close on a bit of a tangent. Here are a few examples of innovations I personally thought would consume the industry and haven’t:

Research and Analytic Services: I thought by know there would be industry reports, pricing surveys, and indices flowing through the marketplace educating lead buyers on companies and lead buying. After all, these purchases are often thousands of dollars.

Instead, lead buyers ask who the best lead providers are in open forum posts on Broker Outpost and are furious when they regularly get screwed by lead providers no one has ever heard of…

Pull-based Lead Management: It is all the rage in supply chain management, marketing, and now social media. It inherently automates the perfect management of inventory (product/ads/leads). What’s more, it is driven by the customer, not a regular guesstimate of demand.

Instead, marketing pushes leads in and marketing hopes for the best from sales. When marketing misses ROI or sales misses production goals, which kicks in one of three reactions: complaints about lead quality, switch lead providers, or buy more leads.

Lead Market-Orders: This solves one of the biggest failures in organizational lead management. An oversupply of leads. Generally lead buyers buy in bulk orders–why? Because lead generators buy media in bulk. If lead buyers required on-demand lead buying, lead exchanges would become the default model.

Instead, marketing/lead managers are continually guessing how many leads sales will work and sales gets leads whether they work them or not.

What is Your Opinion?

Your turn. What are innovations you thought might evolve into the online lead generation space that haven’t or don’t work perfectly? Why?

(photo credit: access.denied)