Pay-For-Performance

If you need sales leads, a pure performance-based service (e.g. pay-for-performance, pay-per-lead, etc.,) probably sounds like an attractive way to go. Depending on the vendor, you can potentially avoid most, if not all, of your up-front costs. So it seems to eliminate your financial risk. Then why doesn't it work?

While pay-per-lead does usually eliminate your up-front costs (assuming that there's no set-up charge, and you don't have to pay up-front for the leads), it does not eliminate all your risk. In fact, it simply defers the cost (in most cases amplifying it significantly,) and increases the risk of failure well beyond reason.

First we'll tell you why this happens. Then we'll tell you its impact on your business. Then we'll prove it.

Given today's economic environment, a good metaphor for a pay-for-performance campaign is an Adjustable Rate Mortgage with a 0% teaser rate and no money down. Except in this case you might lose your business instead of your house. But analogies are easy. Let's take a look at what happens in a pay-for-performance campaign, and how it can cost you your business.

Typically, a pay-for-performance program stipulates a set of "lead qualification criteria," and a price that will be paid for qualified leads which, while it may seem a little high, would certainly be acceptable if the leads are good. There might even be a formal contract so everyone agrees on what counts as a lead, and when the payment is due. So far so good.

But let's look at it from the vendor's perspective. One would like to think that he's willing to bet his own money on his ability to produce leads for you, but is that reasonable? How does he know he can produce leads? How does he know what they will cost? Certainly he'll tell you that they've done it before, and that he knows roughly what it will cost, but if he really knew your cost-per-lead, expected close rate and margin in your market, (which he would need to know quite precisely in order to set a compensatory price-per-lead,) why is he in the telemarketing business? (He is an entrepreneur, after all.) He should be in your business. You can't use the excuse that he's invested in a telemarketing company, since if he knew those costs accurately he could easily borrow the money to get into your business - more easily even than you could! Or he could broker them, or just sell them to the highest bidder. But he doesn't know them, because he can't know them. He's just setting a price based on gut instinct. He's not betting on his ability to produce leads for you. He's betting on something else.

Or maybe you think he's playing the "probability game," that he's got multiple projects and if one hits, he wins. He might tell you that that allows him to offer a lower price because he'd be spreading his risk, (actually it would lead him to demand a higher price because he needs to compensate for costs sunk on failed projects,) but a reduction off of a meaningless number is still a meaningless number. Either way, it certainly doesn't do you any good if he fails. Of course, your response is that, if he fails, it hasn't cost you anything; but it really will cost you quite a bit, as you'll see. But ultimately he doesn't care whether he can produce leads or not, whether they're any good, or what they cost. He just needs to set a price you'll accept because, again, he has no idea, nor does he care, whether he will be successful. Why should he care? Because he's a good guy? (Not likely.) Because he likes to gamble? (A real businessperson would demand a much higher ROI than what you're going to pay for a qualified lead.) The fact is that he doesn't care because he's not selling leads. He's selling something else entirely.

If that doesn't begin to make you nervous, let's look at how he runs his business to see what's actually going on.

There are two approaches that companies take to providing a pay-for-performance service. One is where the employees are paid hourly; the other is where they are paid on a performance basis. Let's look at how the performance-based payroll looks first.

In the case where the employees are paid on a performance basis, ask yourself if you think it would be reasonable for a telemarketer who can generate qualified leads well enough to generate them for you at the drop of a hat to risk his family's welfare on your business. (You probably already tried to find one, and couldn't, right?) Do you really think that someone who is that good would be willing to gamble that you're going to agree that the leads are good? And that you're going to pay for them? This isn't to imply that you're not honest, and willing to pay for the leads that are good; but what about the gray areas? What about the honest disagreement where the vendor or the telemarketer says it's good, and you say it's not. Will that ever happen? (Think 80%+ of the time.) Do you really think a good bird-dog is going to stick around if it happens more than once? Not likely. In fact, no good telemarketer will work on a performance basis unless it is a "gimmee." And if it's a gimmee, why are you paying $500/lead? The short answer is that if they're paying their people by the lead, they can't be using good people. And maybe you don't even care about the quality of his people, but again, to the vendor it doesn't matter - because that's not what he's selling anyway.

In the case where the employees are paid by the hour, it should be clear that the vendor has now increased his out-of-pocket costs, and risks, not only on his employees' ability to generate leads, but your willingness to pay for them. Not that any sane businessperson would do that, but let's look at the numbers. Let's say that he pays his people $10/hour, and charges you $500 per appointment. He may even pay his people a per-appointment bonus to motivate them. Assuming that they can generate a lead in less than 50 hours (assuming there's no bonus and no other expenses,) he makes money, right? Sounds like a win-win: The telemarketer makes money, you make money, and the vendor makes money. But what kind of a business model is it where you might disagree about whether a lead is qualified or not? Do you really want to be debating every lead? And what if you win the argument? What do you think the vendor is going to do the next time? Keep generating leads that you're going to argue about? Don't bet on it. Today you might feel comforted by the fact that you can control your costs with the approval process, but it is that very comfort that only serves to draw you into the trap.

By now you should begin to see the game he's playing. He's not betting that he can generate leads for you - of course he can generate leads for you (although they might not be any good). He's betting that he can get you to pay for them. (He is a salesman, after all.) He's betting that between the creative writing of the "lead qualification critera," the adjudication process, and your desperation to increase your sales he can win enough times to make money. He's betting that you will give him the benefit of the doubt on the first few leads so that he can cover his marketing costs or even make a few bucks. And he's betting that he'll be ahead of the game before you get tired of arguing. Think about it, wouldn't you give him the benefit of the doubt on the first few leads - if for no other reason than to motivate him the stay with it? And once you pay, you've lost. Ask yourself: What's he really selling? Leads? Or getting you to pay for them?

Let's be clear: The only thing that matters to him is that you pay for the leads. He doesn't care if they're qualified or not. How could he? Regardless of what he does, or of the quality of the lead, he ultimately has no control over whether they're qualified - since you're the judge, jury and executioner. Now you could argue that he should care because if he generates good leads, you'll pay for them; or that the criteria are clear. But he knows that - when push comes to shove - you WILL push back. This is because you're only human, and you're running a business; and you will resist paying as you've already demonstrated by the fact that you're opting for pay-per-lead. And he also knows that if the survival of his business depends on your integrity and good will, based on what you've already done (in opting for pay-per-lead,) he will lose - so he simply will not play that game. He knows that instead of worrying about generating leads, he needs to spend his time getting you to pay for them. Congratulations on an excellent strategic decision!

So let's now talk about what this does to your business - because it will have an impact. There are a couple of situations that we've seen in the market, but here are two of our favorites:

So now let's add insult to injury: What caliber of telemarketer do you think he actually had on the phones calling for you? Do you really want someone making minimum wage representing you? What do you think the telemarketer was telling all your prospects about your company while he was trying to generate those leads? You didn't want to pay for a proper set-up, right? But he had a script. Really. If you were a busy decision maker and someone called you with that script, what would you do? Now multiply that by 500 companies per week, and see what's just happened to your image in the market.

Pay-for-performance is - charitably - a classic case of "the law of unintended consequences." This is because, if you can't tell by now, the vendor is not selling you leads. He knows you want leads, that's what draws you in. He also knows you're afraid to risk the investment, i.e. that you don't want to take a chance that it might not work; but that you're a probably nice guy and would repay his willingness to take a chance on you by giving him the benefit of the doubt when it comes time to pay - at least for a while. That's what makes you a target for the, uh, service. So he sells you the promise of good leads for no up-front cost or risk. And that's what you've bought. The comfort of a promise. Like cheap insurance, though, it's there until you need to make a claim.

And the funny thing is: You probably offered to pay him whatever he wanted!

We've been in this business for a long time, and the irony of companies trying to lay off their marketing risk onto a vendor never ceases to amaze us. Do you really think that someone would, or should, take a bigger risk on your business than you without an equity stake? Do you really think that you can get the type of talent it would take to generate qualified leads for your business for free? The reality is that when you tell the vendor that "if you take the risk, you will get the reward," they know that you are the one taking the risk; you just don't know it yet. Looked at less charitably (if it were possible,) when you use a pay-per-appointment service you are trying to get something for nothing - and so you will get what you deserve. If you do get any leads, you will overpay grossly for them; but it is far more likely that you will simply trash your market, destroy your sales team, and waste an enormous amount of money and time. And for what? Because you don't have the money for a pilot program? Do yourself a favor: If you don't want to pay for a legitimate program, run an ad in the local paper and hire an in-house telemarketer.

Before we get to the proof, though, there's one version of the pay-per-lead model that is worth noting, and that is the case where you have to pay up-front for a certain number of leads. The guarantee is that, if the vendor doesn't provide the agreed number and quality of leads, you get some of the money back. In this case, if your goal is to avoid up-front costs, this clearly does not achieve that goal. Otherwise, it is basically the same guarantee that we offer: You can stop at anytime, and get back any unused funds. Calling it "pay-per-lead," where you pay up-front, though, is a misnomer - as it is a pricing gimmick, not a program structure. Call it whatever you like, the vendor already has your money, and now you have to argue (in this case on a lead-by-lead basis,) to get it back. At JV/M, we set goals on every program (of course!), and refund any unused portion - no questions asked.

So now we come to the "proof." While as well-reasoned as the argument above may seem, it is obviously self-interested. But a recent study by the Aberdeen Research Group on the B2B Teleservices industry demonstrated unequivocably that pay-per-lead approaches produced far fewer qualified leads, had a far lower ROI, and failed in the vast majority of cases. You can buy the study for around $5,000 - about the same amount as a decent pilot program, by the way.