The Caution About 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 usually work?

While pay-per-lead does often eliminate your up-front costs (assuming that there's no set-up charge, and you don't have to pre-pay 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, sometimes well beyond reason. And in some cases, it's actually a con.

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 high or low to you, (and, by the way, it doesn't much matter which is is,) 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. You'd like to think that he should be willing to bet his own money on his ability to produce leads for you because he's so good. But is that rational? Why should he do it for you, and not the hundred other people who call each week wanting pay-for-performance programs? More importantly, how does he know that he can produce good leads for you? How does he know what they will cost him to generate? 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 what your cost-per-lead was going to be, (as well as the expected close rate and margin in your market, which he would need to know in order to set a compensatory price-per-lead,) why is he in the telemarketing business in the first place? He's an entrepreneur; he should be in your business. You can't use the excuse that he's invested in a telemarketing company, since if he knew your costs, he could easily borrow the money to get into your business - more easily even than you could (because you evidently have a lead generation issue!) Or he could broker the leads, or just sell them to the highest bidder. In other words, what does he need you for? But he doesn't know these costs, because he can't know them. He's just setting a price based on what he thinks you're willing to pay. He's not betting on his ability to produce leads for you; he's betting on something else entirely.

If pushed, he might tell you that he's playing the "probability game." That's where he's got multiple projects going, and if one makes money, he wins. He might even tell you that that allows him to offer you a lower price because he's spreading his risk. (Actually it should lead him to demand a higher price because he needs to compensate for costs sunk on his failed projects.) But a reduction off of a meaningless number (i.e. some supposed cost-per-lead,) 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 eventually find out (including time, expectations, reputation, money, and any salespeople you have.) But ultimately he doesn't care whether he can produce leads for you or not. He doesn't care whether they're any good, or what they cost. He just needs to set a price that 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, if he's taking all the risk, would demand a much higher price than what you're willing 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. He's selling snake oil. He's selling hope.

If this hasn't made you nervous yet, let's look at how he runs his business (assuming he even has one,) 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 truly good telemarketer (i.e. someone who's trying to put his kids through college, and who can sell well enough ring your cash register 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 qualified, and that you're going to pay for them (and that his boss is going to pay him)? You've already proven that you're in "short pants" because you're looking for pay-per-lead in the first place. (We know, the real reason is that you've been burned before, and you don't want to throw good money after bad.) But do you really think that someone who knows what they're doing is going to wait to see if you're good for your word? 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 you disagree more than once? Not likely. In fact, no good telemarketer will work on a performance basis unless it has a proven process, and a proven cost (in other words, a "gimmee.") And if the process has been proven, and the cost-per-lead is known, what difference is it to you whether you pay per-lead or per-hour? The short answer is that if the vendor is paying their people by the lead, they can't be using good people, in which case you're not going to get any good leads. But even if you don't care about the quality of his people (which you should), 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 (even if he has to make them up). He's betting that he can get you to pay for them. (He is a good salesman, if nothing else.) He's betting that between the creative writing of the "lead qualification critera," the acceptance 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?

In other words: He's not your partner. You're the "fish".

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: You've been conned.

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:

  • Some vendors will start by giving you a few leads, and some will be good and some will be bad. You agree on compensation, your guys go out on the calls, and maybe one turns into business, or maybe not. But you're happy, though, because you either made some money (unlikely,) or you think you're going to make money. So you keep going. Now you get a bunch more leads, and some are good and some are bad. But now you don't want to pay for the bad ones. Why should you? They're bad - obviously so; and you can't keep being a good guy forever. So you debate with the vendor, and because you have the checkbook, you win the debate. Now the vendor does one of two things, depending on how you handled the debate. If he thinks you're a soft touch, he'll start showering you with leads, hoping to make up in volume for your cutting down his list. If he thinks you're hard-nosed, he'll walk away. In the first case you'll end up with a lot of junk to chase, and waste a lot of time and money; in the second case you'll end up with nothing, and just waste a little time and money. Ask yourself: What is the impact of having too many leads? Well, how do your salespeople feel about going on a lot of wasted calls, and what does that do to your field sales budget? And in the other case, what is the impact of the vendor walking away? Ask yourself what you would have done with the time you wasted, and what the vendor said to the 500 people per week they pitched while you were arguing with him about the payment.

  • Other vendors will simply shower you with leads from the get-go figuring to throw a bunch of stuff against the wall and see if anything sticks. They know that that's what you want anyway because you probably told them that "the more leads you can produce, the better." Did you tell him that you currently close 35%, or 50% or 80% of the leads you get now? (Why not just give him your wallet now?) So now you're getting 25 leads a week, and your guys are running all over creation following up on bogus leads. How much does a field sales call cost you? $100? $200? $300? Times 25, plus the cost of the lead? How long before your salespeople are so angry that they revolt? Or quit? Ask yourself: Do you really want to work with a vendor who makes more money the more he runs your salespeople around? Even if the quality were there in 50% of the cases, which is an impossibly high rate - do you really think your salespeople will tolerate a 50% rate of tire-kickers? Could you really afford it? And, in fact, when you pay on a per-lead basis, the percentage of good leads is usually in the low single digits. What does that do to your business model?

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." (Less charitably, and quite often, it's a pool hustle where they keep raising the ante - raising the price-per-lead - before you realize nothing's closing.) 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 - because the vendor is holding the money. 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 miserably 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.

Or you can simply ask yourself, who's really getting conned here?

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