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Understanding Lead Gen for the Home Performance Industry Professional content

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By Peter Troast - February 2nd, 2012

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.

What is Lead Gen?

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.

How do Lead Gen Businesses Make Money?

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.)

Making the Math Work

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.

Lower Quality Leads

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.

The Caveat to Lower Quality

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 generation efforts 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.  

Bottom Line

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.

Check out our white paper for more information about web marketing for the home performance industry, or get in touch with us.


Comments

"...they’re really just out to intercept the searches of people who are really looking for you." Hear, hear! A truer line was never written. Posted by Allison A. Bailes III, PhD on Feb 2, 2012 6:05pm

Thanks Allison. We live to beat Service Magic and the others in organic search for our clients. They're formidable and aggressive, but it is possible for even small home performance companies doing it right to beat them. Google, after all, really does want to reward solid companies doing good work. 

Posted by Peter Troast on Feb 2, 2012 7:21pm
I was approached several years ago. I asked some questions and considered the service. I sent an inquiry from a email address that was not my business one requesting service in our industry. The result was such that I was convinced this was not for me. Posted by Glen Gallo on Feb 3, 2012 12:07pm
You are spot on Peter. I tried one of the companies they swallowed Improvenet early on. I won a few really great repeat customers, but for the most part there was a lot of chasing and not much closing. I think we were closing approx. 10% of the leads we received. Posted by Chris Bellanca on Feb 3, 2012 6:26pm

Thanks for chiming in Chris. I really wish I wasn't right in this case. It would be better for all of us if Lead Gen were a more reliable source of quality leads. But I'm afraid the conversion numbers you're experiencing are exactly what I'm hearing from folks all across the country, perhaps even on the high end. 

Posted by Peter Troast on Feb 4, 2012 10:21am

We was approached in the past. I asked many questions and deemed the service. I sent an inquiry from the email address that was not my company one requesting service in your industry. The result was such that I was convinced this became not for me personally.

Posted by Passbeemedia Apple Ibeacon on Dec 17, 2014 9:16am

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