Everyone should be aware of what’s been going on in the sub-prime market, but how this sub-prime melt down going to effect the mortgage lead marketplace? Many of these sub-prime companies purchased large amounts of leads, upwards in the tens of thousands a month, and suddenly are not buying anymore today. In my opinion, many lead-gen companies have recently had the rug pulled out from under them because of this. The question is, how this going to effect us? Is this a good or bad for the lead buyer?
If you’re expecting an answer I’m going tell you right now, I don’t have one, but I have some ideas. First, Internet marketing spend, by many of these lead-gen companies, has been the rise for the last 6 months. I think I saw a statistic that showed Internet Marketing spend up by40% from last year. These companies are forking out some serious dollars in hopes of filling the demand they have created. Today that large chunk of that demand has fallen off the face of the planet. Many of these companies also signed 6 to 12 month advertising contracts with the search engines. The companies that didn’t sign the long term contracts will be able to adjust there spend according to their demand and should be fine, but what about the ones that did? My question to you is: Do you think prices will increase or decrease? I think an argument can be made for both. Prices may have to decrease to increase the demand for their leads, the simple law of supply and demand may apply here. Some companies may raise their prices in an effort to re-coop as much of the marketing spend they can and then try to sell their left over volume to an aggregator or lead marketplace. I think both are possible.
Not only are these lead companies feeling the effects of the sub-prime debacle but many buyers are tightening up their filters, asking for lower LTV’s, higher loan amounts, better credit scores. I think we may see some lead-gen companies that are unable to compete and go out of business because of these issues. We may see some of these companies try to monetize there leads at any cost. This could be good for us because they may be more flexible with pricing. I recommend you guys to feel out your providers, they may be willing to get rid of their leads at a lower cost than what you are paying now.
What are your thoughts or predictions?
I have a fealing prices may decrease to create a demand for the leads. Really good question though. I guess we will have to wait and see.
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If mortgage companies were the only companies buying on-line marketing, then the decrease in demand might drive prices down. But the reality of the situation is that they are NOT the only companies buying on-line media and so prices will continue to drive upward. On-line advertising costs will continue to rise aggressively. So, for the companies that depend on this advertising (media AND SEO) for their customer acquisition, who at the same time are seeing their margins contract as a result of the contraction of the sub-prime market, they will have to either greatly raise their prices to offset the margin contraction OR buy cheaper marketing (read: poorer converting leads). Either case, the proposition for the loan originator buying these leads and looking to convert them at the same rate of current profitability within this model is pretty bleak.
Maybe mortgage related keyword pricing on search engines will dip a little bit, but this represents a small part of the overall market – probably less then 15% — as the lion’s share of customer acquisition is in buying media (banner ads, sky-scrapers, etc). But I even see this less likely. Interest rates are not going down anytime soon. Thus, the contraction of the market will result in a greater demand for marketing. SEO-generated leads tend to convert the best so will always be in demand. Thus, the greater scarcity of quality leads (as a result of the effect described above) will likely continue to drive pricing up in this arena too, even as demand is affected by the loss of significant buyers in this arena such as New Century.
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Good point Insider. I agree, mortgage lead-gen companies do take up small portion of the Internet Media buying market so I can’t foresee any change in media pricing (keywords, banner ads, etc.) I first assumed that prices would increase and they still may, but from talking to a handful of providers they all have been willing to unload their leads at a lower cost.
Again, great argument.
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Here is a great way to monitor the lead providers buying cycles, particularly as they compare to other companies and industries:
http://www.clickz.com/showPage.html?page=3625188
You can see Jan 2007 reflected an amazing surge–will it carry?
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You are absolutely right, Morinsight. Prices right now are very good. But the reason is, the big buyers budget and place media buys at least 30-45 days out. That means, then, that the leads they are generating right now were bought with the expectation that some of the major players would still be buying leads right now, which they are not. So as a result, there is an abundance of inventory and essentially no one to take it. The lead companies would rather get something for the lead than nothing, even if it is at a significant loss, so that is what you are seeing right now. It is essentially a “fire sale.” What will be very interesting is what happens come about May 1. My prediction is that the lead companies that operate with this customer acquisition model will either have to dramatically raise prices in order to still buy quality media (have seen some of this already with at least one company that I know of), or they will have to buy less media (thereby generating less leads) or less expensive media (thereby generating poorer quality leads). My prediction is the latter, that the companies that rely on media buys to generate their lead volume will see their lead quality suffer as they no longer have the same buying power to compete for higher-quality media buys.
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I agree with many of your points; however I don’t think quality is going to be effected as much as you are alluding to, at least I hope it won’t. For that argument to come to fruition lead-gen companies would have to make drastic changes to their online marketing tactics. A company would have to go from top placement banner ads to email spam marketing and I don’t think this going to happen. There are too many options in between those two medians they would’ve overlook before going straight to the cheapest marketing available. Of course volume will be affected if a provider went from MSN to a text ad on your local news paper site, but I am not convinced that the quality would differ that much, if at all.
Because lets be frank and honest; the big media buys (MSN homepage banners, etc) do not create better converting leads, they create more volume. That same ad placed on your email account or city website is going to attract the same lead, just not as many.
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