Title Slide

The SEM Trap- Bill Gurley

Title Slide

The SEM Trap- Bill Gurley

Definitions

Organic –traffic that comes directly to your site

SEO –all traffic you receive directly from oneof the major search engines

SEM –all traffic you purchase on a variable

ratebasis (keywords, affiliates, CPA, etc.)

Insert picture of “Free Beer”

SEO: To the Victor Goes the Spoils…

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Some Thoughts on SEO

Hyper competitive market Fighting for a scarce resource Five key slots on first page More entrants will be coming to market …AND you are constantly chasing an algorithm

which is unquestionably changing

High risk / reward Exponential advantage for top positions Small changes have big impacts

Everyone needs to do this well But don’t play unless you play to win You can’t outsource this Hard to have a long-term differentiated advantage

More to come at conference…

Why You Have Comfort: LTV Equation

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Why Doesn’t Bill Gurley Like SEM?

1. Scarce Commodity Input 2. RedQueen / Treadmill Effect3. SAC Will Rise or Volumes Will Fall4. Horrible Margin Comparison Vs. Organic5. SEM Dependency Is Hard To Break6. Stifle Innovation!

SEM

#1: Scarce-Commodity Input

SEM is a large commodity you “must” purchase Just like steel for autos and fuel for airlines You are subject to the ebbs and flows of the price of that product

…But, this material is scarce, not abundant! There are only 3-4 key spots on the planet!

Many of the factors are out of your control The game will get tougher over time (more entrants) And the price may clear above “rational” break-even

The market price is set by the dumbest player in the market Worse than steel for autos or fuel for airlines – competitive “disadvantage”

30%SEM YourBusiness.com

Red Queen

“In this place it takes all therunning you can do, to keep

in the same place.”

#2: SEM is a Treadmill

…but one where the incline keeps increasing over time

If you want to be effective at SEM You must lead and invent

continuously You must maintain a

position as the best in your business

#3: SAC Will Rise or Volumes Will Fall

What will likely happen to your SEM market dynamics over next 5 yrs? Will your competitors improve skills? Will # of participants increase? Will their be more demand for same amount of

keywords? (they are finite) How will you respond to aggressive new buyers? What if your “supplier” enters your market?

This “practice” has many external dimensions You don’t control the input It is finite and scarce It can be bought “out from under you” Your supplier can integrate downstream

#4: Horrible Margin Comparison vs. Organic

Everyone knows that SEM is less profitable than Organic After all, you have a marketing cost in the 15-35% of sales

…But its worse than that On a contribution $ per visit basis (this is the right metric) Organic can outperform “purchased SEM” by 10X !!!!

Why? Because conversion rates are dramatically higher Customers that CHOOSE to be there are high converters Customers that are SOLICITED to visit don’t perform as well

#5: SEM Dependency Is Hard To Break

“When you're hooked, you're hooked.”

Year 1 (growth) Year 2 (growth) Year 3

Total Reveunes 100.0$ 30% 130.0$ 30% 169.0$

Organic 33.3$ 70% 56.7$ 55% 87.7$ SEO 33.3$ 0% 33.3$ 0% 33.3$ SEM 33.3$ 20% 40.0$ 20% 48.0$

Organic 33% 44% 52%SEO 33% 26% 20%SEM 33% 31% 28%

Starting with 33% Organic

Starting with 10% Organic

Year 1 (growth) Year 2 (growth) Year 3

Total Reveunes 100.0$ 30% 130.0$ 30% 169.0$

Organic 10.0$ 280% 38.0$ 62% 61.4$ SEO 40.0$ 10% 40.0$ 10% 40.0$ SEM 40.0$ 30% 52.0$ 30% 67.6$

Organic 10% 29% 36%SEO 40% 31% 24%SEM 40% 40% 40%

#6: *** SEM Stifles Innovation ***

SEM is a huge “crutch” that limits creative thinking in your organization Limits marketing and product innovation LTV models are fools gold, because they decay Direct marketing techniques are not differentiated Easiest way to get customers (relatively speaking)

Is your marketing/product group innovative? Do you have a marketing budget? Take away their budget and you will see real

innovation “Necessity IS the mother of invention”

Can You Make Money on SEM?

Yes! Many of you are good at it. Many people are (currently) horrible/bad at this We have a whole section on this at the conference

But… Don’t do it unless you are really good at it Don’t outsource this, it’s a recipe for disaster

There aren’t 10 percentage points to “give up” It’s ultra- competitive – you have to be the best The market may clear “irrationally” high

Always remember, the really big winners didn’t get there this way

Leading Market Capitalizations

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Vonage vs. Skype Slide

[must get from om or niklas]

So What Do You Do?

#1 – Go ‘Grass Roots’ Viral marketing techniques Resourceful & effective PR Is your site content that can be

pasted elsewhere? Clever technical hooks (RSS)

Easier said than done Not formulaic (Like LTV) That’s what makes it unique That’s what makes it valuable

Insert picture of Kinks Album“Give the People What they Want”

#2 - Insanely Great Products…

Really hard …but there is lasting leverage How much time do you spend on this? What are your goals here? Can you be deterministically better than your competition? Do you sweat the details?

Recent examples Skype Apple iPod Myspace vs Friendster World of Warcraft SecondLife vs. SimsOnline/There.com

Tests: “Wow” Do they tell others…

“About three years ago we stopped doing

television advertising.. We did a 15-month-

long test of TV advertising. And it worked, but not as much as the kind of

price elasticity we knew we could get from

taking those ad dollars and giving them back to

consumers.”

“More and more money will go into making a

great customer experience, and less will go into shouting

about the service. Word of mouth is becoming more powerful. If you offer a great service,

people find out.”

Conclusions

You need to be great at: SEO SEM …but these techniques have limitations…

The way to win BIG is to grow organic traffic through: Grass roots PR and marketing Insanely great products Embracing and measuring customer loyalty

Title Slide

The SEM Trap- Bill Gurley