Tuesday, January 29, 2008

Customer Rotation

Paul Kedrosky takes a quick look at a graph of advertising growth and GDP growth since 1983 and says, essentially, "See, they're correlated." Well, yeah. But he's not answering his own question: how does this affect Google/Yahoo?

Ad spending growth is highly correlated to GDP growth. About 52% correlation since the end of World War II, according to my data. And, from a quick peek at my graph, it looks like the other 48% is often an exaggeration of the GDP movement.

Note, though, that there have only been three times since WWII that ad spending has not grown (in nominal terms): 1961, 1991 and 2001. Couple this with the fact that even if ad spending is flat, money is moving from offline to online, so online will continue to grow. Kedrosky just isn't making the point he thinks he's making.

But I have some reservations about Google myself. While Google is a good proxy for online advertising in one sense, since it's so large a piece of the online advertising spend, there are some limits. Online ad spending is not all one thing, and one type of online ad spending can come at the expense of another type.

So, here's what's been bugging me: (a) I recently spoke to a good company that sold online mortgage leads to brokers that has had to shut down because their customers stopped buying, and (b) Niki Scevak points out that LowerMyBills just cut their affiliate payment from $40 to $6. This suggests that mortgage lead gen is hurting.

Okay, no need to snicker at me. Here's the puzzling part: take a look at the Mortgage Banker's Association's data on mortgage originations applications.

Look at the graph for last year and the beginning of this year: mortgage applications are doing just fine, while mortgage lead generators are hitting the skids. How to explain this?

Here's my hypothesis: advertisers are fleeing to a different type of "quality." They're moving to display ads, they're trying to figure out social media marketing, they're building widgets.

Normally in a downturn, there's an increase in spend in measured media, the more measurable the better. Downturns feed direct response. But this downturn, if it is one, is different. It's not driven by fundamental weakness in the economy, it's driven by a rotation of customers. Mortgage lenders still have plenty of customers to choose from, but they've completely reversed course on who they want as customers. A year ago, subprime borrowers were the most profitable; now a lender wouldn't touch one with a ten foot pole. When you're trying to bring in subprime you use Google, you use email, you use targetted, transactional, response-driven ads. Lead generators are the kings of this kind of marketing. But when you want more of the everyday, safe but low-margin customers, you don't need targetting. You need reach and frequency and all that. This may be bad news for Google (relative to its past growth) but is probably good news for some of the more mundane but more established online media.

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