The trouble with LookSmart: flat click pricing
In the latest quarterly report, we learned that LookSmart is still hovering around break-even and projecting a so-so year. A number of theories have been put forward to explain its weakness, ranging from lack of moral fiber to its dependency on MSN.
There may be some truth to those charges, but I'm surprised that no one has put their finger on what may be the fundamental reason that LookSmart's progress has stalled after it saved its bacon with a shift into the pay-per-click model: its failure to adopt the same market principle that has driven the growth of competitors Overture, Google Adwords, and Findwhat.
When LookSmart shifted from "pay for inclusion once" to a "pay for inclusion and then pay for clicks" model, it priced clicks at a flat 15 cents. Sound reasonable? It isn't.
Keywords and click-throughs all look sort of the same on paper, but the difference between getting exposure on the words "soy milk" and the words "mortgage refinancing" could be as different as getting exposure on a bus stop bench in a lightly-traveled road in a heavy-industry district and getting exposure on national television. It could be as different as dropping leaflets on a large city of illiterates and handing out free Blackberry pagers to Fortune 500 CEO's. You can't put a flat price on this stuff.
Because pay-per-click advertisers now track everything, they are aware of metrics like cost-per-customer-acquired, cost-per-order, cost-per-lead, etc. The price of the clicks is virtually irrelevant, except that for costs per lead to be in line with profitable targets and industry averages, some businesses need really cheap clicks (10 cents might be too high), and others will be willing to pay $1.50 per click to get exposure ahead of their competition who also track their results and are willing to bid as high as $1.45 a click.
What is probably happening right now, given the likelihood that LookSmart-generated traffic doesn't, on average, convert as well as Overture or Google traffic, is that a certain percentage of LookSmart advertisers have seen their conversion data and now know that fifteen cents is no bargain. So they suspend, or at least, fail to increase, their LookSmart budgets. The remaining advertisers - those who do turn a profit at fifteen cents - might be willing to outduel one another and bid prices up to 40 and 50 cents or more. But LookSmart is content to give it to them at fifteen cents, thus permanently limiting their upside.
That's not LookSmart's only problem, but clearly, adoption of the market principle is something that LookSmart must consider if they are to realize the same success with the pay-per-click model that others have. Clicks are worth vastly different amounts to different businesses targeting different consumers. Does a local television station charge $50,000 for a 30-second spot at 2 a.m.? More to the point, can you get a 30-second Super Bowl spot for $200?
The MSN dependency is a serious issue too. No matter how hard LookSmart works on its product quality, customer service, etc. - the fact is that when you begin charging by the click, you are now a little less like search and a little more like an advertising network. An advertising network must find places to put its ads. LookSmart currently is short on distribution partners.
Boxed into this tight spot, LookSmart could deke its way out of danger by merging with similarly-valued FindWhat. FindWhat could advise them on how best to implement the market principle in their product offering, and, of course, deliver a sizeable number of distribution partners to LookSmart. Lately, LookSmart has been acting like a company with $400 million in the bank, making "high-minded" acquisitions of little search companies and cool "projects." Time for a reality check.