by Jonah Stein and Jonathan Hochman

The FTC recently announced guidelines for bloggers that requires that they disclose financial interests, freebies and paid reviews.  This decision is seen as a shot across the bow of pay per post networks and bloggers who are monetizing through affiliate programs.    The FTC has decided that compensation is the reason bloggers choose to write about a particular topic and that readers deserve to be informed about the financial relationship.    The FTC logic is simple, “As much as those bloggers who receive these gifts would like to claim this isn't the case, freebies like free laptops, trips, or gift cards are likely to influence a writer's opinion of a product.”  

On its face, the policy is defensible.   As crusaders against Virtual Blight, we applaud the intent of this decision.  Anything that raises the barrier to online scams, fraud and abuse even a little bit is a good thing. The FTC provides guidelines for responsible bloggers and theoretically eliminates a couple of the perks for bloggers, but it does virtually nothing to protect against fraud. 

Going after bloggers’ compensation to fight online fraud is reminiscent of the RIAA attacks on individual file sharers and is just as likely to succeed. The absurdity of the power and inertia of a government bureaucracy combating individual bloggers is only matched by the ludicrous assumption the government could ever move fast enough to keep up with professional scammers who jump from domain to domain, host to host and country to country with a few mouse clicks.  Prosecution could only be effective against mainstream bloggers with an established brand that are stationary targets, but these bloggers are not the right target.

Getting a proverbial free lunch in exchange for a presumably positive review may create the appearance that some bloggers are shills who lend their prestige and celebrity to their sponsors.  That perception is not unreasonable, but the same charge could be made against almost every athlete, actor, musician or American Idol runner-up who profits from our celebrity culture. 

Giving items to celebrities or other tastemakers in return for public exposure is a practice older than the printing press.   If the FTC really wants to send a message about compensated endorsements and freebies, the answer is not to go after the mommy bloggers who get a free 42-pack of diapers.  If the FTC were serious, they would begin arresting every actress wearing a designer gown to the Academy Awards and then round up the studio and network executives who rake in cash for product placements in movies and television shows.

Focus On Fraud

The statistics for online fraud are both staggering and predictable.  Instead of being distracted by the sizzling, sensational charges of payola that re-appear every generation, the industry needs to focus on the billions of dollars of online fraud committed each year.  According to the Center for American Progress, Internet-related consumer complaints are among the top ten in consumer complaints in 2008 and the number one complaint in four states.  These complaints run from auction fraud and non-delivery of ecommerce items to reverse billing scams.

By any definition, the perpetrators of online fraud are not bloggers.  If a review constitutes fraud because the reviewer was provided a free product or had some undisclosed relationship with the company who produced the product, then every journalist with a 401k full of mutual funds needs to hire a good lawyer.  Indeed, if bloggers are guilty of anything it is tabloid journalism -- writing low quality content with sensational headlines designed to attract visitors to their site in order to collect advertising revenue.  This may not live up to the highest journalistic standards, but the only crimes are against facts and the English language.

Criminals are the people and companies who create pyramid schemes, networks of spam blogs to sell diet products like Hoodia and Acai Berry cleanse, Google money trees and the myriad so called “free” offers that create recurring charges on your cell phone or credit card.

Criminals are the people who target kids’ sites to distribute Trojans, spyware and adware that infects our computers and tricks people into buying phony anti-virus products.  Most of us have either experienced malware nightmares ourselves or heard a friend’s sad story.  When online fraud is so prevalent, predatory and destructive, why are government resources being committed to pursue advertorial content?

Ad Networks Are the Key

The biggest thing these criminals have in common is that they perpetrate their scams by buying advertising through ad networks.  These networks have achieved the scale that makes it efficient for legitimate advertisers to reach millions of consumers and that makes them an ideal vector for scams, abuse and deception. 

In an unregulated auction-based advertising market place, fraudulent offers can often pay the highest bids for keywords. In FTC Going After Bloggers – Epic Fail, Aaron observes that ad networks that syndicate ads based on “maximizing yield efficiency“ are well suited to syndicate fraud. Advertisers of scams can afford to pay top dollar for ads because their profit margins are nearly 100%.

Ad networks are morally responsible as collaborators in interstate and international frauds perpetrated upon hundreds of thousands of victims each year.  Google, Yahoo, AOL, Microsoft and many others are far more culpable in consumers being defrauded than any blogger or network of bloggers.

In False and Deceptive Pay-Per-Click Ads, Harvard’s Ben Edelman estimated that as much as 70% of the revenue generated by some online scams actually wind up in the hands of the search engines.   He estimated in 2006 that Google and Yahoo were making over $200,000 a month from advertisements for screensaver software which contained spyware.  As of July 15, 2009, the top paid search results on Google for “screensaver” contain “add-on features” which include spyware, change your default browser settings, ad toolbars and otherwise aim to monetize by deceiving users.  Adding insult to injury, Edelman observes that many of these adware tools monetize by sending traffic through AdSense and DoubleClick, making Google a silent partner for adware companies like WhenU and Smiley Central.

Fight the Problems that Be

Scams and fraud not only harm the consumer, they foster the perception that the internet is not a safe place, hindering the growth of online business and delaying the transfer of marketing dollars from old media.  Instead of waiting for government agencies to step in and create regulations aimed at yesterday’s scams, as an industry we need to become proactive and develop a cooperative framework for mutual self-defense, a neighborhood watch designed to keep consumers safer while helping law enforcement focus resources on the most serious trouble makers.

The war on online fraud is going to be a huge struggle and one we are unlikely to ever declare victory.  The issues are complex, but the industry could significantly reduce the problem by creating a transparent mechanism to collect user feedback about advertisers.  Search engines and ad networks are quick to endorse behavioral targeting and social recommendations to boost earning per exposure.   For some mysterious reason, they have not applied these innovations to getting user feedback about advertisers.  

If the Internet is the cesspool that Eric Schmidt, CEO of Google says it is, one way to start cleaning it up would be to create a public reputation system for advertisers.  This would simultaneously reward honest companies while helping consumers protect themselves against the bad guys.   eBay created public reputations for buyers and sellers many years ago.  Why are advertisers free to operate without scrutiny? 

It seems straightforward to build an advertiser rating system to share relevant statistics and user feedback.  Why not provide the tenure of the advertiser, normalized click volume, the percentage of users giving feedback and a ratio of clicks to complaints along with a link to detailed reviews that could surface fraud, misleading advertising and scams?  If comparison shopping engines can do it, why can’t ad networks?

We don’t claim to have all the answers, but we see the problem and its sources. Government agencies need to ask the ad networks why they accept money for promoting fraud.  Ad networks need to grow up and behave like responsible businesses. 

One of the common questions we get is how to build links for a new site. In our training site we offer our 12 week link building roadmap and a list of directories to submit to, but I also thought I should discuss link building in general. A good basic rule of thumb (though a bit conservative of one) is to build links in a manner where every month you build as many or more links than you built the prior month.

Graph of 3 Different Link Profiles

3 Common Link Building Strategies

1. spiky. if the spikes are associated with news and viral marketing then that is not a big problem, but if they are sorta bought links, low quality links, etc. then this is sorta the worst way to do it.
2. linear. not as bad as spiky...but not as good as geometric. this is where a webmaster tries to build the same number of links each month.
3. geometric. this is where link building starts off slow, but then keeps getting better each month.

• If a website is a real website that is generally a useful utility and did not do any viral marketing this would be the most natural profile of how to build links
• The reason links keep building faster is that exposure breeds more exposure and if the site is genuinely useful and original some people will link to it even without you asking. This phenomenon can be described through understanding cumulative advantage and self-reinforcing authority.
• Plus as you build a useful site and do some social networking it builds social capital that can be leveraged when doing future promotions of featured content.

Some Caveats...

• While I try to do geometric when I can, sometimes we build links a bit spike because sometimes we do things in a rushed series or sometimes we do viral marketing.
• The viral stuff is not harmful...if you do quality viral stuff you want big spikes of links from it because those will be very hard links for competitors to try to clone. But odds are that some of our links might only count partially when we build them in spikes and there is no viral story associated with it.
• If we know we are going to be somewhat spiky then we try to spread it out and pace it a bit with a month to a month and a half in between each build effort (rather than do it all in the first week).
• When launching linkbaits you can't guarantee which ones will work and which ones will not. But the key is to launch them regularly. You wouldn't want to do a couple of them that go viral in the first month, and then follow up by doing none for the next 6 months.
• Brand new sites only get partial credit for links until their own site ages a bit and gets trusted more.
• Older sites that are pretty well trusted with a strong foundation of links can be quite spiky with no problem at all.
• BUT older sites that only have a few links and suddenly build a ton of links real fast can end up with ranking issues.
• After sites are established enough they may not need to work on doing too much link building (especially if they are pulling in many organic links due to the exposure from their current rankings and/or other distribution channels like email and blogging). BUT if they do nothing and the competition keeps investing in link building then eventually they will catch up.

Link Anchor Text

It is also worth noting that you don't want to use the exact same anchor text on every link. Using a variety of related phrases (seo blog, seo blogs, search engine optimization blog, etc.) would be far better than just using the exact same anchor text over and over again.

Many Types of Links

You can be successful by primarily building 1 type of link from a class of websites, but if you can get links from a variety of types of link sources that will make your site strong and rankings stable even if one class of links gets deweighted. Todd Malicoat's Balancing the Link Equation is the canonical resource on that topic. And the more diverse your link profile is the harder it will be for a competitor to clone your work.

Following on from our posts on SEO business planning, let's take a look at allocating capital. We'll also take a close look at one of the most important areas for SEO consultancy start-ups: advertising and marketing.

Allocate Budget

Never a truer phrase was said than "you need to spend money to make money". Thankfully, in the SEO game, you don't need to spend a lot, like brick-n-mortar companies need to do in order to get going.

How do you decide where to spend your money? Do you go by gut feel? Do you quantify and measure results? Whatever approach you use, the end result is that any spend you make should ultimately grow revenue.

Common Areas Of Capital Allocation For SEO Companies

Let's take a look at three areas in which a start-up SEO company will likely spend money. Equipment, staff, and sales and marketing.

Equipment

The SEO business isn't capital intensive. Many SEO consultants need little more than a computer with an internet connection. If you hire staff, then obviously you'll need somewhere for them to work, but besides that, capital investment is minimal.

Staff

If you're a sole operator, obviously you have no fixed staffing costs, other than the wage you choose to pay yourself.

You'll likely need to budget spend for outside contractors for doing work you can't do yourself, or work that it isn't worth your time. For example, if you're a sole operator, you'll want to spend as little time as possible on non-core activities. Non-core activities are activities that don't lead to revenue generation, such as administration and accounting.

By the way, a good accountant is worth their weight in gold. By ensuring that you claim all the deductions you're entitled to, you have more money to invest in your business. You can write off a part use of your home, your computers, your internet connection, travel and more. Accountants are relatively cheap, and their fees are more than covered by the tax savings they produce.

If employing people, figure out the total cost of an employee and their likely return in terms of revenue. Costs can include office space, equipment, training, travel, insurance, employment agencies, management overhead, and payroll tax. Employees obviously need to generate more revenue than they cost to employ, but so long as this calculation runs in your favor, you can keep adding employees, which will keep adding to revenue.

Advertising & Marketing

So how do you get new business in through the door? Do you employ sales staff? Rely on word of mouth? Advertise in trade papers? Speak at conferences? Buy PPC? Undertake SEO?

Any new SEO business should allocate sufficient resources to advertising and promotion. Without awareness, there are no customers. And without customers, there is no business. On the flip side, spending a lot of money on marketing and advertising that doesn't lead to increased revenue results in no business either.

Methods of Establishing An Advertising Budget

"Half the money I spend on advertising is wasted; the trouble is I don't know which half." - John Wanamaker, US department store merchant

No method is ever perfect. If we knew our spend would always result in profit, business would be very easy. Here's the most common method of determining the appropriate level of advertising spend.

Calculation Based On Percentage of Sales

Advertising is a cost, just like staff and equipment. It's also an investment in your future. How do we know how much to spend on advertising?

Typically, businesses allocate advertising on a percentage of sales basis. They take their total sales figure for a given period, and ear-mark a percentage of those figures for advertising in the next period. Advertising spend should move in tandem with sales.

Here is a more detailed calculation, aimed at retail, but also appropriate for SEO:

Take 10 percent and 12 percent of your projected annual, gross sales and multiply each by the markup made on your average transaction.Deduct your annual cost of occupancy (rent) from the adjusted 10 percent of sales number and the adjusted 12 percent number. The remaining balances represent your minimum and maximum allowable ad budgets for the year.

So what percentage do you use?

This will vary, but as a guide, look at what other SEO companies are spending on advertising. Join trade organizations to get hold of these figures.

Be careful not to duplicate these percentages exactly, because your business situation is unique. There might be times when you spend a lot more on advertising than others, especially if you are aggressively targeting new markets, or looking to out-compete your rivals. There will also be times when you spend a lot less. For example, you might have more work than you can handle, and advertising would just exacerbate the problem! SEO consultancy can be a difficult business to scale up easily due to skill shortages.

The important take-away point is that advertising should move in tandem with sales, most of the time. If advertising spend is not related to sales, then it is easy to spend far too much, and have little to show for it. Spend and measure, spend and measure. Repeat.

What if you have no sales figures?

If you're a new SEO business, you won't have any past sales data to go on. This is why it's important to be aware of what other SEO companies are spending. If you've been going a while, you'll have some past data to work with, but keep in mind that past earnings might not be indicative of future earnings. There will be a fair bit of estimation and forecasting either way.

Always Set Objectives

Set clear, specific objectives when allocating capital.

An objective such as "boost profits" is too broad. Go for something specific, such as "sign up 30% more customers than the month before".

Next, figure out which channel will reach your target market. Conferences? Trade publications? PPC? SEO? Web? TV? Radio? A mix?

Whatever channel you choose, be sure to measure performance against your stated objective.

Unless you're trying to build a significant brand to spin off to someone else, such as YouTube, that objective should be grounded in increased revenue. Few, if any, SEO companies can operate at a loss for long, so base your key objectives, and your spending, around increasing revenue, and ultimately - profits.

What were the reasons you started your SEO-related business?

Perhaps you're thinking of starting one up.

A survey published in New Business UK found the following:

• 41% went into business because they were passionate about their idea
• 39% wanted the freedom that came with being their own boss
• Only 7% cited money as being the reason

It's interesting to note that the biggest obstacle people faced with starting their own business was a lack of money. 44% cited lack of money as being the biggest obstacle.

Whatever your reason for starting, it's clear that money is important. The one thing that is guaranteed to kill any business dead, no matter how good the idea or how many customers a business signs up, are bad numbers.

How Are You Going To Make Money?

In a previous post, we looked at SEO business planning.

In short, a business plan doesn't need to be complicated, it's just a plan of where you're aiming, and how you intend to get there.

Here are a few further important points to consider.

Obviously, the most important thing to do in business is earn more than you spend. Fail to do so, and the business fails. That means flash offices, expensive chairs, flying business class, etc all must wait until profits allow such expenditure.

So it's a good idea to model oneself on Scrooge McDuck, at least in the early days!

The one thing you'll have the most control over is costs. Keep these as low as possible. Pay yourself the bare minimum you need to live. If you're hiring staff, offer them low salaries and revenue share. You may have noticed there is a start-up culture where fun, hip-ness and enthusiastic participation is emphasized. This is almost always because the owners are trying to keep their costs down. The benefit to the employees is seldom coming from wages, so the job has to be made attractive in other ways.

Keep a look out for hidden costs. What is the true cost of attending that conference? What does it really cost to hire and keep employees? What is the cost of scaling up? Does your office equipment need regular servicing? What are the costs of maintaining a lot of customers? Hidden costs are, of course, hard to spot, and hard to generalize. Be aware that any new variable you introduce to your business will incur costs of some description.

Economic rent, or making a profit over and above the cost of the inputs, is the key target you should aim to be above in your forecasts. If you make $100,000 a year from your business, and take it all in salary, that means that your business makes nothing. Your salary is a cost.

Do your projections allow you to make a profit over and above the salary you pay yourself, after all other expenses are deducted? If so, you've got a business that is likely to thrive, and you you may one day be able to sell.

It's surprising how many business owners don't include their salary as cost.

Break Even Analysis

Here's the meaty bit.

How can you determine, very quickly, if your idea will fail?

You need a break-even analysis. A break-even analysis shows you the amount of revenue you'll need to bring in to cover your expenses, before you make a profit.

Knocking up a break-even analysis is a great way to trial an idea before you put it into practice. After mapping out a simple, back-of-the-envelope business plan, it's the first thing you should do. If you can make these numbers work, then the rest of your detailed business plan can flow from there. If you can't get past a break-even analysis, then the rest of your plan will likely fail.

Here are the components of a break-even analysis:

• What are your fixed costs? i.e rent, insurance,power and other set expenses and overheads.
• What is your sales revenue?
• What is the gross profit on each sale? i.e. the money left over after the selling costs are taken out
• What is your average gross profit percentage? Divide your average gross profit figure by the average selling price.

You should now be able to easily calculate your break even point. Divide your annual fixed costs by your gross profit percentage to determine the amount of sales revenue you'll need to bring in to break even.

Is your break-even point higher than expected revenues? You'll need to change your cost structure (make cuts), or increase the profit potential of your sales.

Can you do without employees? Work from home? Sell your product for a higher price? Target a more lucrative market?

If you can make the numbers work at this point, move on and create a fully fleshed-out business plan. If you can't make the numbers work after a few tries, then dump the idea and try another. Pat yourself on the back for being smart enough to run a few numbers, before wasting a lot of time and effort executing a bad idea.

Most people jump straight to the latter.

TechCrunch published an anonymous attack piece on search engines...both the organic and paid side. Lets deconstruct some of it, shall we?
techcrunch.com/2009/07/13/the-time-has-come-to-regulate-search-engine-marketing-and-seo/

"It’s now conventional wisdom that search engine optimization, representing the organic result sets on any search query, is more voodoo than science."

And it was conventional wisdom that you needed to own tech stocks because "this time it is different". And it was conventional wisdom that housing goes up forever. We didn't care when fraud was looting trillions of dollars, but now you need to be compensated for your own intellectual sloth & laziness? Please.

Most of the market is willfully ignorant and mislead. Just like in most big money markets. Nothing new there.

What about public relations and branding and other forms of marketing? Most people are ignorant of the influence, so should we just ban marketing? Without marketing do consumers get more or less choice in the marketplace?

If strong search rankings are an unfair advantage then are good domain names and memorable 800 phone numbers also worth regulating out of the marketplace?

To most people rocket science and evolutionary biology and even basic economic literacy are more voodoo than science...does that mean we should shut them down? Shall we run society based on the will of the handicapper general?

"In addition, consumer behavior dictates the top three results on any search page are all that matter. "

They may be most important, but you can still build a real business by ranking a bit lower on the search results. Also people search for billions of unique search queries each month, so its not hard to rank in the top 3 for something.

Keep a lean business if you want to use search as your primary distribution channel. Invest in slow sustainable growth as opportunities present themselves.

The line "all of your eggs in 1 basket" also comes to mind. If search bounces around then try to offset that risk by building other distribution channels including offline, word of mouth marketing, repeat customer sales, affiliate marketing, building a strong brand, etc.

"And at any one time, the controller of these borders (that is, the search engine itself) can change and manipulate those rules – and that can substantially decrease or destroy all organic traffic coming to your website, without notice and without your knowledge."

Use analytics to track your search traffic. If your site has its rankings destroyed and you do not notice then you either didn't have much of a business, or are not investing properly in knowing your market. Either way you would deserve failure if you were reliant on a traffic stream and were not actively measuring it.

"Because the rules of organic and paid search change frequently – and remain undefined — agencies and other traffic brokers can win big; through their experience, they’re capable of reverse-engineering these rules. This means that, as this market matures, individual businesses have a diminishing chance to actually compete and gain search market share. That, in turn, puts them in a position of not only needing to hire an agency in order to find any traffic, but also making it more expensive overall to build businesses on the web."

The same analogy could be stated for businesses buying up key real estate locations and building efficiencies into their supply chain model - like a Wal Mart or a McDonalds. The same analogy can be made for huge online networks that cross promote new sites. The same can be said for banks that are too big to fail while smaller ones are slaughtered off and sold to the big ones.

If business owners are too lazy or cheap or ignorant to invest in one of the highest ROI business functions of the last 100 years then how can anyone have sympathy for them? There are millions of dollars worth of tips on this site shared freely. And people can get direct help with their site for as low as $100. If they can't afford that, then they should not be on the COMMERCIAL web.

"The only real solution is disclosure. Transparency. Those traffic generators that use rule-based algorithms to determine result sets must publicly disclose their methodologies. That is the means by which all businesses can compete freely in the organic and paid search marketplaces."

Except this is not true. For numerous reasons

• as the algorithms grow more complex, the transparency of them would still only benefit a few key players while setting a high barrier to entry for small businesses. all this would actually do is drive small businesses out of the marketplace faster. we outrank corporations worth $10s of billions of dollars for keywords that are important enough that they target them on their homepage titles. make the algorithm transparent and there is no way we could compete at that level.
• if algorithms were transparent automation and testing would be abused by larger established trusted websites. some news companies already use robots to write content. give them a high PageRank, offline distribution, algorithmic immunity, and the source code to the algorithm and I can't imagine how I would be able to compete against them.
• media and marketing are rarely if ever transparent. and when they are it often backfires because people feel they were influenced and/or used. manipulation in the traditional media world goes on all the time. I suppose it is time to write another post about media transparency