• by dave.b , Max Kalehoff , June 12, 2009

As people continue to search for more local business information online, it is inevitable that local advertisers will follow. Over the past year, we expanded our startup's offerings to address local advertisers, a segment comprising hundreds of thousands of local businesses in the U.S. We originally launched with a simple dashboard for search advertisers, but recently introduced a white-labeled technology platform for online advertising service providers that serve thousands of local businesses.

Through our development, we gained a unique perspective on the challenges the local marketing industry face as dollars continue to transition to online at the expense of conventional, offline channels, like print directories. For years, analysts forecast an explosion in local online advertising, especially search. But we saw firsthand tremendous friction preventing faster, sustainable growth. With a stake in this market, we wanted to gain a much deeper understanding to improve search-marketing performance for local businesses.

That's why we asked Borrell Associates, a research and consulting firm that tracks local ad spending, to study the economics of local search advertising, and surface key challenges, solutions and opportunities. Though its research was underwritten by our startup, we agreed that Borrell would approach it independently to strengthen objectivity and explore new territory. To be sure, this work has prompted  healthy debate and valuable commentary, mainly because it's called out key challenges like high customer attrition, questionable sales practices, and an infrastructure unable to scale. We believe such candid examination and discussion is the best way to surface market friction, identify opportunities and improve search-advertising performance, for everyone.

The key findings?

-- First, local search advertising is a big market, and it can work very, very well. And that's why Borrell projects locally placed search advertising in the U.S. to grow 30%  over the next five years, from $4.1 billion in 2008 to $5.3 billion in 2013.

-- Despite growth forecasts, the local advertising industry needs to change to achieve long-term sustainability. Many online advertising resellers and affiliates, who service local businesses, churn half their customers within a year's time, and some lose as many as 90%. This is often due to missed expectations and a lack of return on investment for local-business customers. In fact, many advertising resellers have business models that rely on applying aggressive customer acquisition strategies to overcome top-line losses due to customer attrition.

-- Importantly, Borrell says that advertising products and value must be easily understood by local businesses. That requires a shift from selling Web site visits to selling measurable leads and phone calls. Indeed, Web site visits aren't worth anything unless they're the right visitors. Moreover, if you're only selling visits, how can you optimize advertising investment to reach profitability goals? The short answer: you can't. Local businesses, just like large sophisticated advertisers, expect the profit needle to move -- and there can be no mystery about the way this is accomplished.

-- Finally, according to Borrell, growth in the local search advertising industry will be led primarily by advertising service providers that adopt scalable technology infrastructure and recalibrate their economics to allocate more customer investment to search media spend. The study revealed that it's not uncommon for local service providers to pocket half or more of their customers' investments, while applying the rest to poorly optimized media spend. That's not sustainable.

Don't be mistaken: Local search advertising will be massive, but the segment must reform and innovate. There's friction to overcome, yet the opportunity is tremendous. In the end, there will be many winners.

Where do you see local advertising headed?

(You can download a free copy of Borrell Associates' research report here.)

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