Paying Competitors to Beat You & Steal Marketshare

Because of the low cost of online distribution a company can quickly grow from being one of your affiliates, to one of your leading sales channels, to being the leading competitor. And once they grow into a destination you can't just cut them off without hurting your customers or your brand, as Ryanair will soon find out.

The strategy of starting off with a harmless consumer focused service that can spread far and wide is what allowed Google to create a system where its leading competitors paid Google to market the Google brand across the leading web properties. It is the same set up that benefits new bloggers...most companies don't see them as competitors until after they dominate the market.

In a recent interview Microsoft's Brad Goldberg said:

Today, if you look at search behavior, search actually isn’t good around verticals. In many respects it is not in the economic interest of a lot of vertical sites to expose more and more of their content to search engines because then they risk being aggregated in terms of traffic.

At some point Google will reach a logical upper limit. Google OneBox is encroaching on many large verticals, and Google merchant search is not far behind.

At the other end of the spectrum, many marketing companies offer to help you get traffic cheaper than you can get it from Google, but only at the expense of creating competition subsidized by your own pocketbook! Years ago Article Insider was selling traffic for pennies a click, but you had to buy years worth of clicks upfront, and then when they published your content the clicks you were buying were below the fold while they placed Google AdSense ads above the fold - so if you wanted real exposure you were stuck paying Google anyhow. More recently John Andrews pointed out a new Marchex strategy where publishers pay Marchex to develop a domain name that offers them low cost traffic, at least temporarily.

By “partnering” with Marchex, these small business men have handed over a portion of their web presence to a company that has invested heavily in their own market. Marchex acquired — and prepped for local business success — a collection of domains like DentalCareIssaquah.com. Today that domain is offered to this dental practice, but tomorrow when they stop paying Marchex’s preferred rate, that domain will indeed be offered to the next bidder. Thanks to Issaqua Dental’s continuing investment in Marchex, that hyperlocal domain owned by Marches has increasing asset value in that local market. Clearly Marchex is a competitor. What a great business strategy! Compete with local small businesses while marketing yourself as their partner, collecting a share of their revenues!

If you are going to make a big online marketing investment make sure your site has reached the point of diminishing returns before looking elsewhere. And make sure that when you look elsewhere you are not diminishing your longterm returns by subsidizing a new market competitor.