With High Churn, Local SEM at a Crossroads
Once upon a time in the world of advertising, life was simple. If you were a brand, the fastest way to reach the biggest consumer audience was through TV. That’s still true though TV is no longer as effective in getting consumers’ attention. If you were a local, small business (SMB), the parallel imperative was to buy print yellow pages. Though SMBs sometimes grumbled at pricing, the yellow pages indisputably delivered value.
Enter the New Digital Reality
Along came the Internet and broadband and the result is the messy fragmented media marketplace we have today – only getting more fragmented with mobile. It’s now very challenging to reach consumers and even harder to maintain their attention. Advertisers large and small are still trying to figure out and navigate this relatively new reality.
Traditional media still deliver value but not at the same level as before. The Internet offers theoretically precise audience targeting and broad reach, but also complexity not found in traditional media. This complexity and the related fragmentation confounds even sophisticated advertisers who, for example, have yet to master “social media” despite the enormous popularity of sites like Facebook and YouTube.
SMBs, for their part, are often confused and even terribly frustrated by the complexity of marketing in the digital era. According to an August 2008 Opus Research/AllBusiness.com small business survey, confusion, lack of budget and lack of time or personnel are among the reasons a clear majority of SMBs don’t advertise online:
Source: Opus/AllBusiness.com survey (survey base 1,000, question n=615)
SMBs have clearly been much slower than their customers to adopt online marketing. And some even maintain the fallacy that the Internet is “not relevant” to their business. Some of the answers in the graphic above reflect a lack of understanding of how the Internet is used by consumers.
The massive SMB market in the US has always been a very attractive target for online publishers and ad networks from the earliest days of the Internet. But the difficulty of reaching SMB advertisers has resulted in development of the current “local search ecosystem” – an awkward set of alliances between traditional (mostly yellow pages) publishers, local search marketing (SEM) vendors and search engines, among a few others. It all works “on paper” but in practice it may be breaking down.
BellSouth and “Local SEM”
In late 2003 or early 2004 BellSouth (now part of AT&T) introduced a product that offered to put SMBs on search engines in addition to the publisher’s own yellow pages site. It was in essence a simplified SEM offering geared specifically to SMBs who wanted to “be on Google,” but didn’t know how. That became the template going forward.
Search engines, unable to acquire large numbers of SMB advertisers directly through self service, turned to established “sales channels” such as yellow pages publishers that could use their “feet on the street” sales reps to reach local businesses. Yellow pages publishers, seeking more traffic than their sites were generating and to prevent potential advertiser defections, all developed similar products: local SEM offerings.
Rather than explaining keywords and bidding strategies, the sale to the SMB was simplified by offering “guaranteed clicks” for a fixed price. That original model has evolved in most cases. But what it permitted was an easy “close” by the sales rep. The complexity of search marketing — setting up and managing a paid-search campaign – was totally outsourced and hidden from the local business. The search engine got ad dollars it might not have otherwise and the publisher kept the advertiser. The publisher-partner/vendor got the headache of fulfillment and managing the campaign itself.
A Perfect Solution That’s Breaking Down
Though a theoretically perfect solution for all players, these local SEM offerings are starting to break down in some cases. There are lots of companies operating in the space and having varying degrees of success. Let’s be clear: what I’m saying doesn’t apply equally to all players in the segment. But in more than a few cases, Local SEM churn rates are between 50% and 100% on an annualized basis.
What that means as a practical matter is that half to all of the SMB advertisers signing up for these local SEM programs are leaving them before the year is out. In some cases, it happens after only a couple of months. In investigating what’s going on, I’ve been offered several explanations by a number of parties in the segment:
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Local advertisers are not being properly educated about SEM and expectations are not being properly set accordingly
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Not enough time is being allowed by the SMB to optimize campaigns
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Sales reps are rewarded according to sales figures only and not retention numbers
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Not enough of the advertiser spend is going directly to media (search) buying, which diminishes the performance of the campaign
Beyond this, the margins for publishers and vendors are thin and nothing like the 50%+ margins of traditional print media. Accordingly yellow pages and some online publishers such as Citysearch are forming direct alliances and trading traffic to start to minimize their direct dependence on search engines and SEM. More broadly publishers and sales channels are seeking to diversify qualified traffic sources to get more and better traffic for less money.
I see this and other related moves in the market as a partial breakdown of the local search ecosystem alliances that formed over the past few years around simple products (i.e., guaranteed clicks) as a way to bring more SMBs online and solve common problems.
The Next-Generation Products
Let’s assume for argument that many of these local SEM products now being sold are unsustainable, what will take their place? After all, the Internet isn’t going away and SMB advertisers can’t return to an all-print strategy.
The challenge for everyone focused on the local space is creating products that can scale, deliver healthy margins and, especially, provide real value to SMBs. But most of what’s in the market today fails in one or more of those areas.
More sophisticated versions of existing SEM offerings that reach broadly into more traffic sources are starting to emerge. And a growing number of SMBs may be able to manage their own marketing on places like Facebook and Twitter because of their relative simplicity. Yet the majority of SMB advertisers will still need help and want to outsource their online marketing to trusted third parties. Accordingly there’s still plenty of opportunity to get the products right and deliver better value to local advertisers.
The marketplace isn’t getting simpler; it’s only getting more complex.