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The inner and outer workings of a digital agency

Saurabh Kumar

Jul 27, 2009 / In Online Marketing

A marketing enthusiast with an interest in tinkering with data and systems. 4+ years at ebookers followed by 8 years and counting at Envigo.

Lead generation for a client

Quite a few banks in India use online lead generation to drive customer acquisition. The appeal of a fixed cost lead generation contract to the marketing manager is evident. In a way, she acquires a mini holy grail, where she has fixed the cost of acquiring a lead on a fully variable basis. She might need 50,000 leads of type 1 in month 1 and reduce this number to 20,000 in month 2 and none in month 3 as her back office is bent under the load of too many leads.

How would the economics work for this?

Suppose a client is in a contract with an agency to deliver around 5000 leads a month at $10 each. In a given month, the client asks for 10000 leads.

Assuming that the agency is delivering the cheapest possible leads, the cost of every additional lead will lead to the average cost of acquisition for the agency to increase. This will lead to a squeeze of margins, to the extent where the marginal profit per lead is negative.

Have a look at the table below.

Scenario: Changing number of leads required by clientAverage costAverage realisationProfit(for the agency)
Total Profit(for the agency)
Scenario 1First 5000 leads$7$10$15000$15000
Scenario 2Additional 2000 leads$9$10$2000$17000
Scenario 3Additional 2000 leads$10$100$17000
Scenario 4Additional 1000 leads$11$10-1000$16000

Case 1

As the volume increases, the agency profits increases, then stays constant and then actually falls. What if the client has asked for as many leads as possible for $10?

From the example above, the agency would try to hover around its profit maximization point and send only between 7000 and 9000 leads. This is dissonance.

What if the client recognizes this problem and then lets the agency charge a higher cost per lead as volume increases. Have a look at the table below.

Scenario: Changing number of leads required by clientAverage cost*Average realisation+Profit(for the agency)
Total Profit(for the agency)
Scenario 1First 5000 leads$7$10$15000$15000
Scenario 2Additional 2000 leads$9$11$4000$19000
Scenario 3Additional 2000 leads$10$12$4000$21000
Scenario 4Additional 1000 leads$11$13$2000$23000

Case 2

*Agency's cost to generate a lead

+Agency's selling price for a lead

In the above table, the agency is happy with the increasing profits.

Below is a summary of lead cost for the client and the agency in the two cases:

Scenario: Changing number of leads required by clientAvg realisation per lead(paid by client)
Agency profit(as a percentage of client spend)
Case 1Case 2Case 1Case 2
Scenario 1First 5000 leads$10$1030%30%
Scenario 2Additional 2000 leads$10$10.324%26%
Scenario 3Additional 2000 leads$10$10.719%22%
Scenario 4Additional 1000 leads$10$10.916%21%

In this case, the objectives are aligned. The client is happy with more leads and the agency with more profits.

The trick here would be to decide on the slabs and the cost of a lead paid by the client.

Leads per monthRealisation per lead(paid by the client)
First 5000 leads$10
Additional 2000 leads$11
Additional 2000 leads$12
Additional 1000 leads$13

Usually in negotiations, the level of transparency is very low, because of which arriving at a well aligned cost ladder like the one above will be difficult.

How about a solution which goes like this?

Have 100% transparency in the cost of a lead and pay a fixed commission per lead which is between 3-6% depending upon spend levels (the higher the spend, lower the commission). All incentives are aligned – the client spends more when the agency is able to keep costs low and deliver higher volumes and the agency has to work hard to ensure the same.

This is what we propose to our clients in situations like this.

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