Borrell Shines Light On “Local SEM” Churn

Google just completed its now annual local reseller symposium. A terrific event last year, I was unable to attend this year but heard from one attendee that there were many fewer resellers there than a year ago. Print yellow pages, newspapers, webhosting firms, stand-alone local sales channels (e.g., ReachLocal, Yodle) and a range of others comprise the the local reseller category. They’re all selling small businesses (SMBs) into search marketing. Whether a function of the economy or for some other reason, the lowered attendance may be a metaphor for the challenges that “Local SEM” now faces.

In October, 2004 I wrote a report entitled “SEM for SMEs: The Model Has Arrived.” That document proclaimed that a then “guaranteed clicks” product provided by WebVisible to yellow pages partners would enable:

• Large numbers of small businesses to buy search marketing in a simplified way
• Enable yellow pages to become the gateway to online marketing (on search engines) for their advertisers
• Allow Google (et al.) to tap the massive SMB market through third party sales channels, avoiding the need for direct outreach to this elusive advertiser population

In contrast to my happy proclamation in 2004, the road for Local SEM has been rocky. On my blog Screenwerk I’ve been writing for the past couple of years about the high churn rates for these products and other challenges. Here’s a representative excerpt from September, 2008:

[W]e’re now in a kind of “purgatory,” where the “old” methods aren’t working as well (they still work in many instances however) and the “new” methods aren’t delivering as promised. It’s a problem for everyone.

I could go on at length and elaborate. However, Borrell Associates has just released a report (underwritten by Clickable; can be downloaded from their site) that attempts to quantify all this. The Wall Street Journal covers the findings at a high level:

Borrell CEO Gordon Borrell also blames the affiliates that are marking up the search ad prices they charge local advertisers to increase their commissions. Local advertisers aren’t generating enough leads to justify what they are spending, causing them to drop out. Furthermore, the resellers are charging local advertisers based on how many thousands of clicks they can drive to their Web sites. But those clicks are often worthless if they aren’t from the right kinds of customers. “Search advertising has been over-hyped and over-sold to local businesses,” he said.

The key findings of the report surround local advertiser churn, which approaches an astounding 100 percent on an annualized basis for some of the resellers. According to the Borrell document, the firm found:

• 6-10 percent a month attrition on gross customer count
• Up to 50 percent [of SMBs] quit by 90 days
• Up to 90 percent quit within 6 months

Some of the resellers do better and some do worse; all will say they’re better than the average, which is roughly 7 percent per month churn. What’s going on? As traditional media are losing audiences and becoming more expensive for the leads they deliver, search is challenged. Why aren’t local SMBs seeing the same results that many of the marketers who read this blog see? Why are they trying these simplified search marketing products and then abandoning them?

From my understanding and experience it can be attributed to several factors that operate to varying degrees in most cases:

• A lack of education for the SMB and appropriate expectation setting
• Not allowing enough time for the campaign to become optimized
• Media salespeople who are compensated on customer acquisition, not customer retention
• Not enough of the advertiser spend going to the media/search buy (as much as 40 percent may go to overhead/profit, yet that may be necessary)
• In a limited number cases, the advertiser seeking to pick keywords or otherwise dictate or manage its campaign from afar (and not well)

Frustrated by the lack of margin on SEM, many traditional publishers are forming networks and looking for qualified traffic outside of the major search engines. Yellow pages and companies like Citysearch have been aggressive in developing alternative traffic sources. Yodle has developed a “network” of traffic sources and publishers that it works with. ReachLocal recently launched an “exchange” for publishers and advertisers. And we’ll continue to see this movement toward SEM alternatives to diversify traffic sources beyond the major engines.

Yet for consumers search engines remain central to the online experience and critical drivers of leads and calls to local businesses. Thus local SEO grows in importance, especially given Google’s recent moves to show the “10 pack” in cases where there is no geo-modifier. In addition, sites like Facebook and Twitter emerge as potentially important providers of traffic and marketing tools for SMBs.

Borrell in its report chronicles the projected migration of ad spending from traditional media to online. The firm says that an additional $15 billion will migrate from offline to online by 2013. And local search advertising is supposed to be one of the big beneficiaries of that shift. But the problems above complicate such estimates. Some of the SMB ad dollars will simply “disappear” as that migration occurs — turn into spending on items that don’t constitute “advertising” (e.g., new websites, use of free online marketing tools).

There’s a lot more to say but the facile observation that the SMB money starting to leave traditional media will simply transfer to online and search in particular belies a much more complex reality.