For a very broad range of search advertisers, both large and small, the targeting of search terms and purchase of clicks is mere prelude to what they consider the ultimate outcome, and the one over which they have the most direct influence when converting a lead: a phone call. Whether the advertiser is a SOHO accountant or a national insurance giant, the clicks they drive are generally rendered valuable only in the context of their ability to lead to actual conversation.

Historically, the market for clicks took hold where it mattered most: for advertisers looking to drive revenue or attention proximate to the click event, primarily e-commerce or other online monetization regimes (such as, ironically, re-selling the same click). But what’s so exciting about the emergent call market is that it’s inherently cross-channel: a web or mobile search, map query, or other digital (as opposed to online-only) event yields a durable, intimate, person-to-person connection in the form of advertiser and prospect actually speaking… and transacting.

In the transition from display to search marketing, we saw advertisers gravitate to a market that provided both better performance (intent was arguably clearer given specific search terms at a moment of consumer need, and generally higher conversion rates), and greater transparency (the ability to measure correlations between a stated consumer need and a desired advertiser outcome at scale). As the market for calls develops, necessarily piggybacking on other established means of generating leads, the same propensity for increased performance and transparency is expressed pretty dramatically:

Performance. Any company, of any size, that secures new customers over the phone will tell you that calls sit far deeper in the conversion funnel than any impression, search, or website interaction ever could. Our own data suggests that in certain categories, phone-based conversions can reach double digit multiples of click conversion rates.

Transparency. Actual voice dialogue with prospects is invaluable, since inference is kept to a minimum. You can literally hear what’s on the mind of the customer: why they called, what they’re looking for and what hooks will get them to convert. Compare this intimate window to the evanescence of a click.

When we look to 2011, here are some of the macro trends we believe will help establish and grow the call economy.

Phones are becoming computers. According to Forrester, 23% of 18-44 year-olds already own a smart phone. On both smart phones and even a broad range of simpler mobile devices, access to information is greater than ever before, and the friction between finding a number and dialing it is as simple as a button press.

Computers are becoming phones. Every desktop and laptop running a copy of the over 500 million downloads of Skype is capable of turning a search for a product or service into a seamless conversation with an advertiser. A consumer can research auto insurance, come to a conclusion, click on a number and instantly speak with an agent without ever picking up a physical telephone.

When you can buy calls, clicks seem exorbitant. If an advertiser needs to buy 50 clicks at $5 apiece to generate a single call, a market that provides a qualified call at the rate of anything less than $250 will quickly cannibalize click budget.

Phone calls convert well, and put the advertiser in direct control. Beyond the notes above on the typical conversion performance of a call, the context—direct conversation with a potential customer—puts the advertiser in the driver’s seat with respect to conversion. As opposed to generally calcified landing pages or web sites, which otherwise would need to mediate between a purchased click and a call, being able to pay to actually speak to a prospect means access to all of the closing tactics of a live sales person.

Phone calls yield intelligence. Even when calls don’t convert, they can be data mined in the aggregate to surface everything from products of interest to knowledge of competitors, to sensitivity to features or price points, to the efficiency of the IVR (interactive voice response) or call center.

The supply/demand equation is solvable. On the demand side, analysts like BIA/Kelsey estimate is that advertisers already spend in the region of $30B annually to drive phone calls. On the supply side, new sources open up every day, from mobile applications to Skype.

To be clear, our belief in the ascendancy of the call economy isn’t without very specific costs, since the barriers to entry are quite high. By way of example, here’s a tiny sample of the challenges of participating in the call economy: having a telecommunications infrastructure that can scale to hundreds of millions of calls a month; being able to data mine audio; securing and homogenizing fragmented sources of supply; educating advertisers about the benefits of purchasing calls directly, as opposed to trying to drum them up themselves; being able to split run test IVRs to optimize for qualified callers; providing direct hooks into large call center workflows; understanding how to automatically recognize a pocket dial on a mobile phone; and a thousand other tricks which are found in no other field of marketing we have yet seen.

Since the turn of the year is a great occasion for shifting from navel gazing to star gazing, I’ll leave the reader to consider this vision: turning every single phone call between a consumer and a business into a monetized event, aligned along the axis of a newly-conceived, efficient marketing economy.

One only has to consider the sophistication of how consumers are using the Internet in 2010 to discover and make decisions about local businesses to understand how challenging it has become for the small business owner to keep pace with this brave new world. Consumers find local businesses through rich mobile search and mapping applications; share their recommendations and experiences on blogs, Twitter and Facebook; upload and exchange pictures and videos of local businesses; and actively—and easily—leverage the network to find discounts, offers and coupons for locally-offered services and products.

From a handheld device, a teenager can find the nearest Japanese izakaya restaurant; confirm through reviews that it’ll sate their yen; make a reservation and earn points toward future meals; find a coupon for a free dessert; get directions to it by foot or public transportation; see its storefront and interior in pictures and video; and then Tweet about, rate and review it before even paying the check. That’s a serious information advantage.

Given the disparity of information advantage, the pain points we need to solve for local businesses—through a newly defined product set—are simple, but of extraordinarily high consequence:

• Small businesses have scant control over their digital footprint
• Consumers make key spending decisions based on that footprint
• Marketing to consumers is less effective than having a dialogue with them

It is our view that we need to go back to the drawing board and take the small business product set, which in the past half decade has advanced from the obvious to the slightly less obvious (the bucket of clicks, performance click packages, performance leads, website creation, business profiles, etc.), to help local businesses maximize the basic realities of the digital and mobile age, in ways that far exceed acquisition marketing alone.

The digital marketing product set of the future will address three primary local business needs:

1. Lead Generation

Selling performance search marketing packages to small businesses has helped define a market in which the measurability of results is critical. In that definition, any product that does not supply leads, on a measurable, performance-oriented basis will not serve the local business as it should. The new local business product set must deliver leads in the forms most useful to local businesses, and while driving traffic to websites and profile pages is of solid value, only providing a broader set of performance-based leads (phone calls, form fills, emails, coupons, etc.) can truly help local businesses get the most out of their online marketing spend. Of all the lead types in this set, we believe phone calls are the real performance leader—and the lead source small businesses care about most.

2. Online Presence Management

Technology has helped consumers gain a significant information advantage, but it has not yet done the same for small businesses, for whom an online footprint, and the reputation it conveys, can make the difference between success and failure. Managing online presence has three distinct aspects:

Data: we have to help local businesses understand where and how they are represented online, to determine and correct the accuracy of their listings, and to maximize the ubiquity of those listings.

Content: local businesses need to understand how they are perceived in the minds of customers, the better to market and operate.

Competition: The above two views of the online footprint are best leveraged in a comparative fashion, to let small businesses understand how they stand with respect to their own competition.

3. Relationship Management

In a world where the value of dialogue is becoming key to high-strength relationship building with customers, and in which consumers are now more vocal than ever about their interactions with local businesses, it’s essential to help the 85% of businesses who today leverage email to connect with consumers. Cultivating relationships with customers is all about leveraging the heterogeneity of online communications today: Facebook updates, tweets, email itself, coupons, blog updates, and other forms of proactive and bi-directional communication with customers.

Finally, our experience—both direct and gained through our reseller partners—has revealed an essential attribute of the winning product set. Given the time constraints facing the average small business, tolerance for complexity is low, and the willingness to leverage multiple toolsets, each with their own credentials, interfaces and vocabularies is practically nil. This is why a product set that unifies the many tasks required to manage small business marketing, in an easy-to-use, simplified presentation, will ultimately capture the greatest share of small business adoption. What we need provide to local businesses are time-saving, simple toolsets that return to them a modicum of information advantage that translates to new and better business.

Two relatively new macro trends have converged on the phone. First, as everyone’s data will attest, web searches are increasingly local in nature, focusing on discovery of products and services offered in the physical world. The second is the migration of a very large small and medium business marketing spend from antiquated offline models (the phone book) to performance-based online vehicles (search, etc.). But while consumer behavior has changed (using search and social media instead of the book), nothing has changed the fact that the great majority of local businesses—whether the sole-operator plumber or a national advertiser like Roto-Rooter—still consider phone calls to be the lifeblood of their business.

To sweeten the deal, for many of these businesses, the phone call is much closer to what they consider the “transaction.” And as we already know from operating an active pay-for-call exchange, phone calls in aggregate convert at 3-10x the rate of clicks.

After a half-decade of connecting, tracking and analyzing hundreds of millions of phone calls, most generated from online marketing activities, we know that one of the key challenges our customers face is preventing fraudulent calls. In the search world, giants like Google and Bing have invested heavily in their ability to detect, understand and scrub fraudulent click activity. But in the calls world, we’re still at the beginning of a long learning period.

Unlike fraudulent clicks, which merely skew tracking data and cost calculation and which can often be backed out of totals for a marketer, phone calls that don’t come from customers have a serious side effect: tying up the line and blocking calls from live customers and leads. And much like the conventional wisdom from the web, a dropped call results in the same outcome as an abandoned visit: a lost customer.

Since the 2003 advent of the National Do Not Call Registry in the U.S. enabled an estimated 150 million consumers to block telemarketing calls, bulk dialers have turned to targeting business lines with B2B offers. And with the explosion of web-based activity focused on finding local businesses, those local business numbers are easier and easier to crawl, scrape and aggregate.

For some of our largest customers, the problem reached a critical point not long ago. Our response—which is half research and half product feature—was to deploy a “honeypot” (a pool of hundreds of thousands of inactive numbers) to detect bulk-dialing activity. When we detect and confirm patterns of repeat call activity across multiple calls, we can calculate the likelihood of telemarketing activity and block the origin. Over time, the system learns more and more about bad behavior and self-corrects for false positives. And because we’re using a dedicated, ever-shifting honeypot, we can learn without affecting actual customers.

While we have thus far been very successful at identifying and blocking hundreds of thousands of fraudulent calls, we’re just at the beginning of the learning process. And given the axiom I laid out above and some of what we see on a daily basis, making good on the promise of “local” is going to mean—for all of us in the industry—beginning to identify, understand and creatively solve the challenges that stand in the way of delivering phone based leads to local businesses.

To put some context around the scope of this problem, Marchex’s Reputation Management product today tracks more than 96 million phone numbers for 17 million U.S. businesses. We’re seeing ever higher numbers of call tracking, toll free, alternate and even mobile phone numbers in the data. In fact, more than 10 percent are classified as “non-main,” (i.e. different from the primary number of the business) including at least 122,000 mobile numbers.

For example, useful telephone technologies can redefine the simple need to associate a phone number with a specific business. Consider retail chains and real estate firms.

For retail chains, there are often local and nationwide phone numbers. These might send the consumer to the same business, depending on time of call, availability, location of the caller or other factors. In real estate, we increasingly see the use of granular routing rules to send inbound callers to a specific office, agent, extension or mobile device based on the time of day, interest in a specific listing or an agent’s availability. As the size of the business and the degree of its dependence on phone calls increase, so do the complexities surrounding the use of a phone number to identify it. We know this firsthand, as our Call Analytics business routes millions of phone calls for hundreds of thousands of specific numbers every month.

One way to think of what’s happening is that businesses, especially those with a local, physical presence, are upping the ante on the value of an inbound phone call. Two things are driving this specifically—technology that enables more fine-grained tracking of marketing efficiency and technology that helps a business improve its ability to serve customers over the phone.

In the past ten years, local businesses have been sold a triad of innovations: web sites that do more than represent them; online marketing that drives new customers; and analytics that prove the value of both efforts. But in the next ten years, a wholly new set of innovations are going to drive real results for small businesses: the ability to receive and track the leads and customers from online, offline and mobile sources through the phone, and telephony and analytics that allow a business to be even more responsive to customers.

Now, back to the problem. There are many businesses, many more phone numbers, and an increasingly tenuous link between phone number and business name. Here’s how the problem shakes out:

Publishers: Today, most online publishers abhor call-tracking numbers. First, these numbers throw a monkey wrench in business identification. Second, they could expire, inadvertently creating a dead-end for a consumer. Publishers today struggle with how to accurately identify an actual business when many phone numbers are involved. What the industry needs to do, and this will (unfortunately) be a long time in coming, is to let local businesses actually “own” their listing data, and to decide how it is represented. Today, this is a highly fragmented, tedious process for the local business, but until the power of information shifts to its rightful owner, the problem will be acute.

Local Businesses. Given slow changes in the publisher landscape, our recommendations are simple:

• Start with major sites (Google Maps, Yahoo! Local, Citysearch, Yelp, and select directories like Dexknows.com and yp.com), and sign up to “own” (read modify) your profiles. Make sure your phone numbers are consistent and correct, and check every month to make sure no changes have been introduced that you didn’t initiate (this can actually happen).
• For each location you operate, sign up for Google alerts for your zip code and every one of your phone numbers (secondary, toll free, fax, etc.), including ones no longer in use. When sites publish new information—correct or not—you’ll know, and can contact them if things are wrong.
• For your marketing efforts (i.e. as distinct from your website or business listings), use a call tracking solution. Not only can you learn which of your efforts drive real leads, but you can also route calls based on the geography of the caller or the time of day (think cell phone after hours).

Longer term, our vision is that a number can truly represent the business, but will also be programmable, and help deliver and track the sources of new customers. We believe performance-based call advertising will become ubiquitous in the coming years. As that happens—and we already see the shift—local businesses, publishers and marketers are going to have to be ever more aware of the complexities of using a century-old identifier, the phone number, with new technologies and in new contexts.

From arms dealer to product maker. Servicing the fragmented small business market with any degree of efficiency requires servicing the channel. And servicing the channel too often puts purveyors of online marketing in the awkward position of making decisions that may be good for the channel but not necessarily good for the customer (for example, margin/ROI tension). Until we make the mental shift from arms dealers to obsessively customer-focused makers of product, we’ll be haunted by the twin specters of low adoption and high churn.

From custodians of spend shift to solvers of small business problems. Our collective first principle can not remain that we are mere custodians of the migration of offline spending to online. Defining our opportunity in this way has limited understanding of our real role: to help small businesses solve the marketing problems they face every day. Ironically, we’re still learning that our world is neither analogue of nor replacement to the print yellow pages.

From acquisition-centric marketing services to 360-degree marketing products. According to one metric I overheard at the event, as many as 40 percent of small businesses don’t even need new customers, but instead face the challenge of cultivating their existing client base. And according to more than one graph I saw at the event, word-of-mouth and online reviews and ratings are considered by most small businesses the primary two drivers of their success. Acquisition marketing addresses only a portion of the market need, which more broadly includes: acquisition (new sources of leads), cultivation (communication with customers and prospects) and reputation (managing a small business’s online footprint and leveraging opinion about them).

From selling to the customer to learning from the customer. It’s a painful truth that online marketing services are sold to—and not bought by—small businesses. Part of that self-reinforcing state is supported directly by the notion (see above) that it’s our job to help shepherd offline small business spend to online. Until we have a deeper understanding of what products really solve the day-to-day marketing and communication needs of our customers, we’ll forever be conjuring demand as opposed to tapping into it.

From consumer-focused local search to business-focused local search. To date, our industry has placed powerful local search technology in the hands of the consumer only, the better to lure them in and deliver them to small businesses as leads. But a few of us are actively turning this model on its head: handing small businesses the same technologies, but also giving them an information advantage they today miss and sorely lack. Until small businesses feel empowered over their digital footprint, they cannot be full and active participants in their online destinies; by extension, until our products ground our customers in the full range of online leverage, we can’t fully capitalize on the market opportunity.

Six years ago, it was a Kelsey event that helped lay the blueprint for work we’re all still conducting; I call that the “local search” phase of our industry. I’m calling this year—lead by the Borrell event and coincident with many of my recent discussions with colleagues and analysts, as well as the early product work of some of us—the advent of the “local product” phase of our industry. The opportunity now, for us all, is to rewrite our first principles and start building new small business-focused products that solve a set of real needs (not just spend shift). When it comes to the “business of making money,” at least from local online advertising, that’s when, I believe, we’ll all start having real fun.

As we wrote recently (“Local Search: A Solved Consumer Problem“), Marchex has turned search and data mining technology on its head to help SMBs understand and leverage their digital footprints. And activity in the beta program of our reputation management service has revealed some pretty critical insights. Here are three notable observations about the ways small and medium size businesses are interacting with customers online.

Engagement.. In focus groups, we saw SMBs filter, slice, dice, and dig into how customers describe them. On average, beta users are spending upwards of 9 minutes per session, with initial visits much higher. Given the ability to filter by affect, dig into statistically relevant phrases, and understand discrepancies in listing data, SMBs are actively engaging with their footprint, most for the first time ever.

Competitive insight. The most frequently used feature is the ability to compare key phrases and aggregated opinions with a specific competitor. In their day-to-day operations, almost all of the SMBs we spoke to have specific competitors against whom they benchmark their business, and this is reflected in their use of the product to actively compare how they stack up in the minds of customers.

Operational Decision Making. In surveying beta users, we learned that one of the most useful features of reputation management was helping SMBs make better decisions about how they operate their business: Is the new chef well received? Is customer service up to par? Do customers like the selection of brands we carry? Etc.

Most of all, what we’re realizing as we watch and learn from SMBs is the increased need for delivering products that engage and deliver real, actionable insight into how those SMBs are perceived in the minds of customers. As we all know, to market and operate effectively, the ability to understand your customers is a must-have information advantage, and technology should—and can—help us.

Delivering clicks, calls, and profile pages, as we’ve learned from our own business, is a necessary, but by itself insufficient way to serve the full marketing needs of the SMB. After all, if customers don’t like the new chef, are made uncomfortable by the supercilious store manager, or find that projects aren’t delivered on time and budget, what’s the point of driving more leads?

To keep its leadership position in search, Google will need to increasingly invest in real-time search of consumer dialogue on the web. And to serve the SMB as broadly as we must, our industry will need to invest in products that transform customer chatter to actionable marketing and operational intelligence – what we’re calling an information advantage for the SMB. Otherwise, it’s all just clicks, listings, opinion and noise.

Put simply, major search engines do a good enough job of surfacing local listings and phone numbers to consumers who need a specific product or service at a moment in time. The rest of the local search “opportunity,” beyond the one or two review aggregator sites lucky enough to also pop up—is all a matter of either SEO (indefensible) or arbitrage (sinking margins). In other words, consumers have accepted the solution the web search engines provide to them, not because it solves the problem in the best possible way, but because they have built intractable habit. Better local search, grounded in innovative product or technology, has little or no opportunity to break the habits the engines reinforce day in, day out, across billions of searches. The battle has been won.

Worse, for the local business, participation in the local result set is not only far beyond their control (show me a plumber effectively competing with YellowBot or Yelp on Google), but a consumer’s very decision-making process is mediated by the sites that control the most content about that business (the review aggregators). This state of affairs is an artifact of the SEO game, in which the plumber can’t hope to compete against the aggregators, often even for specific name and location searches.

So where can a die-hard local search junkie turn to scratch the itch of their burning faith in the local space? To the local business, for whom, I’d argue, local search represents more problems than solutions. The real problem that’s now worth solving is to turn the data set, technology and techniques of consumer-oriented local search to the benefit of the local business.

Last month, my colleague Eric Souder wrote about the value of rich, relevant content on a business’s web site, and the importance of marketing that content appropriately. I’d take this one step further to say that it’s imperative local businesses be just as vigilant and knowledgeable about all of the other places that information is listed across the web, if not more so. Often, a business’ digital footprint is growing without them even knowing it, not just through the propagation of often semi-accurate business details (data), but through reviews and other user generated content (opinion).

I used to claim that the future of local search was data mining, but I think I had it only half right. The future of local search is to leverage data mining to aggregate, summarize, and expose the full digital footprint of a local business, for two explicit purposes:

1. To improve marketing. Learning how a business is talked about by the specific terms it is known for, or where spikes in online activity such as sales or consumer reviews occur, can determine which marketing efforts are working well versus those that are not.
2. To improve operations. Monitoring customer feedback can raise awareness of customer service issues or other unknown problems within the business that perhaps wouldn’t have otherwise been flagged.

At Marchex, we’re calling this problem set reputation management, and we’re looking forward to turning local search back on its head, putting information advantage back in the hands of the local business.