• by Laurie Sullivan  @lauriesullivan, June 9, 2009

Roughly half of businesses that buy search ads directly from Google and other Internet search companies don't come back the following year, but there are ways to curb that trend, according to a study released Monday from Borrell Associates and Clickable.

Many online advertising resellers and affiliates, who serve local businesses, churn half their customers within a year. Some lose as many as 90%. The report suggests that missed expectations and a lack of return on investment (ROI) for local-business customers contribute to the change. The churn rate for ReachLocal, LookSmart and Yodle -- companies that purchase search ads on behalf of local advertisers -- is around 60% annually.

Locally placed search advertising in the U.S. should grow 30% during the next five years, from $4.1 billion in 2008 to $5.3 billion in 2013, according to Borrell. Advertising service providers that adopt scalable technology infrastructure and recalibrate their economics to allocate more customer investment to search media spend will lead the growth.

Borrell CEO Gordon Borrell suggests slowing the churn rate by allocating a greater percentage of investments on search media spend, while optimizing and scaling campaigns with better technology platforms. Advertisers must spend enough time to see profitable returns. Spend the vast majority, between 60 and 70%, on keyword buys, rather than splitting up the budget several ways. Service providers shouldn't accept contracts less than $500 to $1,000 monthly. These contracts won't secure advertisers for long times, but rather short spurts.

Slowing the churn rate also requires running on a platform that helps manage keywords and does a better job of communicating ROI progress and tracking metrics, because Google alone isn't enough. "Don't just say, 'Oh, you have 1,000 clicks. Isn't that great? You spent 25 cents per click,'" Borrell says, adding that advertisers that get frequent updates are more likely to stick around.

Companies tell Borrell that advertising churn rates typically run between 20% and 30% monthly, but rise dramatically at the third, the sixth, and the 12 month after a contract is signed because that's when they typically expire.

In general, the smaller the advertisers, the higher the churn rate. Smaller local advertisers have less patience, want to see a return on investment within three months, and don't typically understand advertising, Borrell says. "If they spend a few thousand dollars, they damn well better hear the phone ring or get business in the door," he says. "National advertisers have more patience, and spend between $10,000 and $1 million per month."

Contrary to Borrell's numbers, Dan Yomtobian, CEO at Advertise.com, sees between 10% and 15% churn, although he admits the company is in the initial phase of expanding by assisting local advertisers get on engines similar to ReachLocal and Yodle.

Support is everything, Yomtobian says. Lower churn and higher profits come with increased media spend. "We are running a lot of campaigns with direct advertisers doing local buys and we're just not seeing that type of churn," he says. "We see the local market as a growth sector because they don't know the ins and outs of running campaigns on Google."

Yomtobian defines "small business" as companies that generate revenue at about $250,000 annually, with two or more employees.