August 14th, 2007

Hot Online-Marketing Niche Cools Fast

By Emily Steel
Wall Street Journal

Generating 'Leads' With Consumer Gifts Sparks FTC Inquiry

One of the fastest-growing parts of online marketing in the past year has little to do with video ads, search engines or colorful figures dancing across a screen. It’s the rather more pedestrian task of persuading consumers to sign up to receive information from marketers, giving up some personal details in the process.

For years, marketers have gathered names of potential customers—“leads” on new business—through questionnaires on product-warranty cards or by buying customer lists from magazine publishers or other subscription-based businesses. But with consumers spending more time online, marketers have begun paying digital marketing firms to collect names of potential customers on the Internet—“lead generation.” Online marketing revenue from lead generation nearly doubled to $1.3 billion in 2006 from $753 million in 2005, taking it to 8% of the total online ad market last year, according to the Interactive Advertising Bureau and PricewaterhouseCoopers.

But lately, questions have arisen about how some of these names are collected. While some ad firms only go after consumers who have shown some interest in a product, others use various incentives to lure customers into giving up their personal information—offering cheap iPods or gift certificates to stores, for instance. The IAB doesn’t track what portion of lead-generation ad spending goes on incentive-based approaches.

Now, not only are marketers questioning the effectiveness of getting names through incentive offers—realizing these consumers want the prize and often have little interest in the marketers’ product—but the practice has also come under scrutiny from the Federal Trade Commission, likely concerned about possible privacy violations or false advertising claims. The result is that some marketers are backing away from the technique or shifting to the more painstaking approach of finding consumers who have already shown interest in a product.

“The plates are already shifting in the ground underneath incentive lead generation. It may not fully be an earthquake yet, but it is shaky,” says Jordan Rohan, an analyst with RBC Capital Markets.

The shift has hit hard some digital marketing firms that specialize in the practice, among them ValueClick, a big publicly traded ad company whose offerings include incentive-based ads. ValueClick has seen its stock fall nearly 40% since May, when questions about the practice began to spread. The company said in May that it learned the FTC was conducting an inquiry of the company’s lead-generation activities, including looking at ValueClick-operated Web sites that promise consumers a free gift of substantial value. The FTC confirmed the investigation, but said it can’t comment further. ValueClick says it believes the FTC is looking into other firms as well. The company said in a recent SEC filing that it was cooperating voluntarily with the FTC’s requests, and believed it was in compliance with all state and federal rules relating to the marketing technique.

ValueClick disclosed late last month, while reporting its second-quarter results, that it had seen a downturn in its promotion-based lead-generation business that began in late May and became “more pronounced in June.” The company said the downturn “negatively impacted” its second-quarter earnings; while its net income was up, its revenue was below the forecast the company had previously issued.

The FTC inquiry has coincided with increasing skepticism among advertisers and ad networks about the efficiency of the incentive-based approach to gathering information on potential customers. Industry executives say the problem with offering prizes is that not only are consumers more interested in the gift than in the marketer’s product, but that consumers sometimes give false contact information to avoid being bothered later by marketers.

In recent months, some affiliate ad networks—Web sites that agree to display content or an ad designed to drive visitors to other sites, often in exchange for a cut of the sales—have stopped accepting incentive-based ads. While the FTC investigation is a factor, the firms said using incentives to get customer information wasn’t good business. Advertisers only had to pay the networks if the “leads” generated results—such as a consumer following up with a marketer for more information—and that wasn’t happening with incentive-based ads.

“Advertisers were not paying us, so eventually we stopped that,” says Robin Maynard, technical manager for PerfectPayCheck, an online marketing firm.

ValueClick insists its incentive-based lead-generation marketing produces “quality” information for advertisers. The company checks the personal data it collects, such as email addresses, to make sure the data are accurate, says John Ardis, vice president of corporate strategy for ValueClick. He says the slowdown experienced by the company “hasn’t been because of lead quality, but more because of this cloud hanging over the industry” from the FTC inquiry.

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