• by Ross Fadner , November 23, 2004

High-tech businesses, newer business, and direct mail marketers are the local business segments most likely to buy sponsored search listings, according to a new report by the market research firm The Kelsey Group.

Those businesses are most likely to turn to pay-per-click because they understand the value of measurement--the cornerstone of direct response advertising on the Internet--concluded the report, titled "The Elusive Small-Business Advertiser: A Segmentation Analysis."

High-tech businesses, defined as having high-speed Internet access and a Web site, are "significantly more likely to measure the performance and effectiveness of their media expenditures," stated the report. And businesses in operation for less than 10 years not only allocate more funds to marketing, but also have a greater need for accurate return on investment measurement because they tend to generate less total revenue than older small businesses, stated the report. Finally, measurement and targeting are familiar concepts for direct mail marketers, the report said.

Despite the recent growth in online advertising, marketing on the Internet remains an afterthought for most local businesses, according to The Kelsey Group. Only 3.8 percent of local business survey respondents reported buying paid inclusion in online business directories, 2.1 percent reported vertical online directory inclusion buys, 1.9 percent utilized pay-per-click, and 1.7 percent used search engine optimization.

By comparison, 31.7 percent purchased listings in the print Yellow Pages, 14 percent purchased inventory in print newspapers, 10.9 percent said they maintain a Web site, and 9.4 percent utilized direct mail. Among small businesses, direct mail was the only traditional media category to receive a boost in spending. The Kelsey Group said direct mail did relatively well because it can be targeted and measured--the key components that should steer direct mail marketers toward pay-per-click advertising.

Still, despite the tremendous overall growth of search engine marketing, local search continues to lack for advertisers. JupiterResearch predicts that local search spending will remain below $1 billion through 2009, while paid search is expected to hit $5.5 billion by then. One reason is that although search budgets have tripled in the last 18 months, there has only been "modest growth" in terms of the number of advertisers, according to JupiterResearch Analyst Niki Scevak.

Another factor, Scevak said, is that most small businesses don't advertise at all--and those that do tend to have small marketing budgets. Getting local advertisers--which The Kelsey Group says have a $5,000 marketing budget per year on average--to allocate spending online remains a "very, very difficult task," he said, with no clear answer in sight, except perhaps to change the pricing model to something that is more relevant to them.

Additionally, figuring out returns on online campaigns is particularly difficult for local advertisers, according to a Merrill Lynch report released yesterday. For its recent report on Yahoo! (See "Merrill Lynch Neutral On Yahoo!,"), Merrill Lynch conducted a study of paid search and concluded that optimization was "consuming and complex" and presented challenges, "especially for inexperienced advertisers and small/medium-sized businesses."

"Based on our study, we believe that paid search is an effective medium, but it will take time for advertisers to see true returns on their online campaigns due to the complexity of optimization. This is especially true for local advertisers," stated the Merrill Lynch report.