Why there's money to be made in channel marketing - if you can get your head around it

This week I wanted to cover an area we haven’t looked at before – channel marketing.

PriceGrabber has completed its MBO from Experian

“Channel” (as it’s often called) is one of those marketing services that’s little understood outside of the marcomms business, and not much better understood inside it.

Essentially, channel marketing is another way (separate from, for example, a field or telephone sales force or a direct-to-consumer channel) for companies to sell their goods and services.

For example, a tech manufacturer like SanDisk might use a channel marketing agency or site to sell (and market) its products through retailers as diverse as Amazon, Jessop’s, Tesco, PC World, Boots, Apple Store and Currys. It will of course use a field sales force and may also sell direct.

Channel marketing has its disadvantages – you may find your channel agency at odds with your sales people; and of course, a retailer channel might carry competing products (in SanDisk’s case, products from Lexar, Kingston or even an own-or-white label product). However, it can also help a company gain profile and distribution: Microsoft and Cisco are two companies that have built their reputations and their dominance at least in part through channel marketing.

One of the most effective methods of channel marketing is via price comparison. For consumers, price comparison websites like Kelkoo, Price Runner, Go Compare and Money Supermarket are a boon – in a busy world, most people don’t have the time or energy to go from shop to shop making notes, or even trawling through scores of websites to find the best price on the product or service they’re after.

Commercially, they’re also highly profitable and cash-generative (which probably explains why there are so many of them). So when the news broke last week that Experian, the global information services company most familiar for its credit reports, had sold its price comparison and lead generation businesses to the management of those businesses for just $80m following the planned sale for $175m to India’s Ybrant falling through in September, I wondered whether the buyers hadn’t snared themselves a bit of a bargain.

Three businesses were sold - PriceGrabber (the best known of the trio here in the UK), LowerMyBills and ClassesUSA – for $2m in cash and a $78m loan note. Now, Experian could get as much as $110m if the new owners meet their profit targets (and it should also make some tax savings) but considering it paid $485m for PriceGrabber and $330m for LowerMyBills back in 2005, it’s taken an almighty hit.

Why did Experian take that hit? It’s not that the businesses aren’t viable (more of that in a moment), but they no longer fit into its strategy. Experian wants to concentrate on its strengths, which include analytics and credit reports (credit ratings provide 47% of its revenues). Channel marketing doesn’t really fit in.

Leaving aside ClassesUSA, the other two businesses (which have UK operations) are pretty sound.

In the year ended 31st March 2012 they had revenues of $283m, though EBIT was relatively small at $20m. PriceGrabber is a reasonably strong and trusted brand in a very crowded market. It also features a lot of user input – merchant and product reviews for example, meaning that visitors don’t have to leave the site in order to get all the information they need. LowerMyBills has a far lower profile in the UK and will struggle in this arena against stronger brands such as uSwitch to increase its profile and reach without very substantial investment.

These businesses work on thin margins – and they require huge marketing and SEM spends to remain top of mind. The other big danger is of course mighty Google. The search giant – which recently added car insurance to its price comparison service – has about 90% share in the UK search market and is aggressively looking for new revenue streams.

That said, the management of these three companies will be familiar with all this and are probably the people best placed to make a go of them. The fact that the bulk of the purchase price is in the form of a loan note from Experian means they also have limited risk.

In a related move, media giant Aegis (owner of Vizeum, Isobar and Carat among others) acquired – for an undisclosed sum - a Japanese search agency called Hablar, also last week. Hablar, founded in 2003, is almost completely unknown outside of Japan but this is an astute buy on the part of Aegis.

Hablar specializes in search and what’s known as “performance marketing” (PM). Similar to, but not synonymous with, affiliate marketing, PM pays out only on a pre-agreed outcome – a click, a sale, a download or a lead; whereas affiliate marketing works on a cost-per-sale revenue sharing model. By all accounts Hablar is very successful at this in the enormous Japanese market.

It has always been difficult for “Western” marcomms firms to break into Japan for all manner of commercial and cultural reasons so this acquisition is a good way for Aegis to gain scale and scope there.

The new buy – which has in fact been working with Aegis Media in Japan for many years – will be merged into iProspect, Aegis’ global search performance marketing division, enabling the group to offer its Japanese clients a wider range of services and strengthening its profile in the Land of The Rising Sun. Aegis’ share price on the FTSE held steady on the news.

And in a final thought, should Japanese mega-agency Dentsu’s proposed buyout of Aegis clear anti-trust hurdles and be completed (sometime in 2013 now looks likely), Dentsu’s dominance in Japan will be complete and it will be able to challenge the big Western groups like WPP, Publicis and Omnicom. Interesting times ahead….

Tony Walford is a partner at Green Square, Corprate Finance Advisors to the media and marketing sector.

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