• by Scott Brinker , November 12, 2008

There are two types of competition in a market.

The obvious one is "horizontal competition." These are all the other companies like yours that are fighting for the same customers. If you're a search agency, other search agencies are your horizontal competitors.

But there's another kind of competition known as "vertical competition." This occurs when you have a chain of suppliers in a market fighting over their share of the value provided to customers at the end of the chain.

Take the movie industry, for example: movies stars provide their services to movie studios, which in turn provide their products to movie theaters, which in turn sell seats to the public. There is vertical competition here because the more money that movie stars can demand, the less money there is for studios and theaters--unless the cost increase can be passed on entirely to the customer.

Vertical competition is all about who has the power in a supply chain. And when you have one irreplaceable supplier at the top of the chain with little horizontal competition themselves, and then companies with a slew of horizontal competitors at the next level down, the power pretty clearly belongs to the supplier at the top. In such a situation, the supplier at the top can raise prices or change policies at will, and the companies in the middle absorb the blow.

Now, I'm a marketing technologist, not a microeconomist, but this sure seems like the situation between Google and search agencies.

I've heard search agencies complain about how there are few barriers to entry, how search marketing is increasingly perceived as an undifferentiated commodity business, and how search engines appear to be indifferent to their plight.

I've heard search agencies having a difficult time getting their customers to pay enough to do search marketing right. Even the old 15% media management fee--which a number of search marketers claim is nowhere near enough to fund top-notch work--is under price pressure from budget-conscious CMOs.

And I've seen Google steadily raise its prices, directly and indirectly, while maintaining a near-monopoly in search advertising.

This adds up to Google being a gigantic vertical competitor to search agencies.

So what's a search agency to do?

Change the value proposition for the end customer, the client.

The reason Google has such power in the search marketing supply chain right now is because most agencies sell clicks, and those clicks are mostly sole-sourced from Google. The conversion rate is often viewed as a side effect of clicks sold.

Search agencies must turn this equation around and be in the business of selling conversions, where clicks are just one component of that--and not necessarily the most important one.

"But how can we sell conversions when we don't have control over what happens after the click!"

You can't. For search agencies to sell conversions, they must take ownership of what happens after the click. Some are already doing this, but it must happen on a larger scale and become a more consistent best practice in the industry.

One way to achieve this is for there to be a space between the advertising and the core Web site run by the client--the post-click marketing space--consisting of landing pages, conversion paths, and microsites. These landing experiences can be under the control of the agency, not the site's internal team, and can be tightly integrated with ad creatives and keyword contexts to maximize message match and audience segmentation.

Recent research from Compete has shown that the "fastest, cheapest way to boost return on your online advertising" is to build great post-click experiences. A study of several competitors in the same market showed that the conversion rate for those in the top quartile with great landing experiences was 515% higher than those in the bottom quartile with poor landing experiences.

Google doesn't sell post-click marketing, so agencies can be at the top of that supply chain. Conversions have much greater value to the CMO than clicks. And since there's much more room for differentiation in post-click experiences than the 130 characters of search engine ads, this is not a commoditized service.