A new wave of such companies have launched (RedBeacon, Billshrink, FeeFighters, Sparefoot, Zillow, Trulia), and some exciting acquisitions have occurred - ITA, Like.com and Farecast. Is now the time for vertical search to break out?

Metrics for Vertical Search Success

Maybe, but vertical search suffers from a monetization disadvantage and can only succeed in instances where the site creates a much better user experience manifested in:

1. a much higher conversion rate and/or
2. lots of free traffic from word of mouth and press and/or
3. materially more links from other websites resulting in better organic search rankings.

Monetization Disadvantage Must be Overcome

Vertical search suffers from a monetization disadvantage for two reasons:

1. It reduces producer surplus and increases consumer surplus by helping the consumer find the best deals and reducing the ability of the producer to trick the consumer with false advertising or teaser offers. There is a good paper on this topic called Quality Uncertainty And Adverse Selection In Sponsored Search Markets.
2. Harder-to-measure forms of advertising typically are more profitable since marketing departments make overly aggressive assumptions about conversion rates and customer lifetime value. This is true of offline vs. online and display vs. CPC, and Bill Gurley has an excellent analysis of why it is true for CPC vs. CPA (most vertical search business models monetize with CPA).

Playing the other side of the equation, lead gen companies have been doing very well and some of the early comparison shopping success stories (like LendingTree) have morphed into lead gen companies.

Perspective of the Detractors

A smart VC said to me, "We just passed/stalled on a [similar business]... We loved every aspect of the model but can't figure out to acquire customers when the leadgen guys have picked over every opportunity since there is a clear and immediate dollar value attached."

A friend at a big lead gen firm said, "We have experimented with similar comparison shopping models, but it doesn't monetize as well and it wouldn't make any sense for us to eat our own lunch."

Long Term Future is Bright

The Internet and existing search engines are still lousy at many search use cases. Ultimately vertical search sites that solve a problem well for users will win and grow into companies of enduring value because users vote with their attention.

To survive long enough to win, however, they need to aggressively optimize conversion rate and figure out non-CPC ways of attracting customers. Founders and investors also need to be patient, since the investment required and ramp-time will more closely resemble that of a software company than a lead gen site.

Image by sachyn