Now let’s explore what this may mean for the online newspapers moving forward by exploring what it means for the banks today.
Assume for one moment you are the product manager for a consumer banking product. This could be home loans, personal loans, superannuation, investments or pensions but for the moment we’ll call it Automotive Finance.
We’ll set the market value of the average car loan at $25,000 and the average loan period is 3 years. The cost of finance is 6% and you are selling it at 12%. So your margin is 6% per annum over the life of the loan. This means your ARPUPM on the interest payment is $135.91 while your AMPUPM is $69.81.
To keep things simple we’ll remove the cost of managing the risk (i.e. Loan Defaults) from the equation so we can focus on the core issue that links the future of online publishing and banking: The average customer acquisition cost (ACAC).
Employing Plan G as an advertising strategy (Think Google AdWords) you discover that the ACAC is $500. (This assumes the key words are expensive and as we have proven before the CTP rates for Google are at the lower end of the market).
This means it will take 7 months to achieve an ROI on the cost of customer acquisition because your ACAC represents 21% of the interest margin for the life of the loan.
The challenge you face is to significantly reduce the ACAC to 10% maybe even 5% of the interest margin for the life of the loan. How would you do this? Probably the easiest way is to negotiate with the web’s Wal-marts (i.e. MSN, Yahoo! and AOL) and the online newspapers to strike a deal based on a fixed price – say $250 or maybe even $125 – for each customer who signs up for a loan after they have clicked through from one of your banner ads residing on their site. Basically the deal is they run the ad for free – providing you with unlimited brand exposure – and only get paid if and when the deal is closed on your web site.
From the publisher’s perspective this is the old style “Browse with you, buy from them” advertising model in action. The problem is they only get paid when the customer buys. Browsing now comes free of charge. With this scenario advertising has (d?)evolved into the trusted referral.
If the customer clicks through while in the office and discovers they cannot fill out the form until they get home because they don’t have all the information required to complete the form then the referrer loses the sale. This is because the customer returns directly to the bank’s site to complete the application form thereby leaving the publisher out of the deal. Design the form correctly and the lost referral rate may be as high as 9 in 10. The risk of course is they may not return later to complete the form on the Bank’s site but that’s what the art of managing the online referral is all about.
As the product manager you are delighted with the deal. Not only have you significantly reduced your ACAC but you have deferred payment on your advertising until after the sale is closed. Plus you get all that free face time to promote your product and brand on a web site with a prestigious reputation. The publisher thinks they have done good business because they can place the ad where ever and when ever they have free space. The reality is the publisher could do better business but in an online world awash with unlimited advertising space they’ll take what they can get.
Clearly, if they are going to grab a larger slice of the revenue pie, the publisher is going to have to start thinking outside the square. They are going to have to start thinking along the lines of “Browse with us, Buy from us”. They need to start thinking about how they can close the sales cycle and provide customers with the opportunity to complete the sale without leaving the site. Yes they could house the applications forms to reduce the leakage but is that really enough? After all the cost benefit analysis would suggest there would be no ROI in this approach. It is easier to leave the Banks to take care of the customer if the only revenue on the table is $125 per completed application form. To maximize their share of the deal they need to be in the business of owning the customer relationship.
This means, rather than providing freemium advertising space in the motoring and finance pages for Banks and Finance companies, they should be in the business of developing their own branded automotive finance products that allow them to share in the AMPUPM for the life of the loan with the Bank or Finance company.
The economic advantages of this model are self-evident.
Under the old “Browse with us, Buy from them” model the publisher achieves an ARPU of just $125 on the deal. With the new “Browse with us, Buy from us” the publisher could negotiate a 50:50 wholesale AMPU deal that delivers an improvement in the ARPU by a factor of 10 across the life of the loan.
This new approach to publishing is not limited to Financial Services. Among a number of other industries it could be applied to Telecoms, Insurance and Energy. Indeed the publisher could profit from developing a package deal that provides the reader with the car, the insurance, the finance and the fuel.
The question is how much of the value chain are the publishers interested in acquiring today to protect their position moving forward. As I have said before survival for the online publishers is all about thinking beyond the limitations of the paywall and putting ads on the menu. They need to start turning traffic into customers.
Further Reading:
Summary: transactional page views provide more margin that display advertising impressions for Fairfax Media. That’s how they outperform the benchmark. – Matt Shanahan’s Fairfax Media is Maximizing their ARPU Equation
Background Reading:
- See it, Click it and Buy it
- Browse with us, Buy from us
- Browsing with you but buying from them
- Notes on the Future of Newspapers
- Pay Wall Economics 101
- Why newspapers need to get sticky
- How to arrange to have somebody else provide your customers with a free lunch
- A retailer you can bank on?
Posted on September 3, 2010
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