Acknowledgements 

We would like to thank the media company executives who participate in our ongoing surveys and questionnaires.  Their willingness to share information and their insights have helped us – and the industry – better understand a rapidly changing media environment.

• Borrell Associates Leadership Team:
• Colby Atwood, President 
• Gordon Borrell, CEO
• Kip Cassino, Vice President of Research
• Peter Conti, Jr., Senior Vice President 

Table of Contents

Executive Summary 

CHAPTER 1 – Hunting the Elusive SMB

Fig.1.1: U.S. Business Units by Employee Size Cohort 

Fig.1.2: Cumulative Share by Employee Size Cohort 

Fig.1.3: Spending Variation by Employee Size 

Fig.1.4: Ad Spending by Media Spending Stage 

Fig.1.5: Ad Spending Variation by Media Spending Stage 

Fig.1.6: Percentage of Online and Offine Ad Spending Shared by Each Media Stage 

Fig.1.7: Media Stage Profile for Building Contractors 

Fig.1.8: Media Stage Profile for General Merchandise Stores 

CHAPTER 2 – What’s happening in River City

Fig.2.1: 2008 Estimated SMB Local Interactive Ad Spending 

Fig.2.2: 2008 SMB Local Interactive Ad Spending by Media Stage 

Fig.2.3: 2008 SMB Offine and Interactive Ad Spending, Showing “Big 3” Shares 

CHAPTER 3 – A Walk down Interactive Main Street 

Fig.3.1: SMB Local Ad Spending - Top 25 Categories, Ranked by Online Share 

Fig.3.2: Online Media Shares of SMB Media Stage 1 and 2 Online Ad Spending 

CHAPTER 4 – More Goes Toward “Non-Ad” Marketing 

 Fig.4.1: SMB Ad and “Non-Ad” Share of ’08 Local Marketing Spend 

Fig.4.2: SMB Ad and “Non-Ad” Share of ’08 Local Interactive Marketing Spend 

Fig.4.3: SMB ’08 Local Interactive “Non-Ad” Spending - Share by Category 

CHAPTER 5 – The Future of Interactive Main Street 

Fig.5.1: Forecast SMB Local Interactive Ad Spending, Compared with 

Fig.5.2: 2009 Spending Plans for Selected Media Choices 

Fig.5.3: Selected Advertising Channels - Percent saying “Perform Strongly for my company” 

Fig.5.4: 2008 to 2013 Change in SMB Interactive Marketing Spending 

Fig.5.5: Change in SMB Local Interactive Marketing Budget, 2008 - 2013 

CHAPTER 6 – Where the Money Goes: “My Own Web site” 

Fig.6.1: Web site Support Spending for SMBs 

Fig.6.2: SMB Web Spending Compared to All U.S. Businesses 

Fig.6.3: Online Services Spending by Category - SMBs vs. All U.S. Business Units 

Conclusions and Recommendations 

Appendix A

Appendix B

Appendix C

EXECUTIVE SUMMARY

As larger businesses appear tapped out, headed for bankruptcy, or just extremely reluctant to continue longstanding advertising practices, local media companies are scrambling to find new customers along Main Street.  These small- and medium-sized businesses, or SMBs, in aggregate may seem like a bonanza:  There are more than 14.6 million SMBs, and they tend to overspend on advertising relative to their size.

In reality, however, the SMBs in any market are less like a two-ton gorilla and more like a thousand four-pound monkeys – difficult to chase down, and almost impossible to corral. The smallest U.S. businesses have average annual sales of $212,000 and spend just $5,671 per year on advertising – typically in the yellow pages or on direct mail ads or on coupons.  But all that’s changing with the rise of the Internet – where they are now investing 11 percent of their advertising, up from less than 4 percent three years ago.

These SMBs are blurring the lines between what’s advertising and what’s not. They consider what-ever they spend on their own Web sites to be “advertising,” though in actuality that spending is a technology, design and telecommunications expense. When marketing professionals were asked in which media they intended to spend more money this year, two thirds of them said…. “My own Web site."¹

^{1 Source: B@B magazine, 2009 Marketing Priorities and Plans Survey, November, 2008.}

As their Web sites look increasingly like storefronts with shopping carts and checkout counters, SMBs are being deluged with offers to drive traffic to them by placing listings in online directories, bidding for keywords on search engines, running e-mail marketing campaigns, and buying display ads on media Web sites.

The SMBs are listening, but not quite cooperating.  They are less receptive to buying banner ads (now accounting for 54 percent of their online spending, but declining) in favor of search-engine advertising, online directory listings, and streaming video.  And they are diverting money toward something that feels to them like advertising, but in reality is technology-supported marketing: Web site design, search engine optimization and customer databases.

Their current rate of interactive advertising spending is no drop in the bucket.  The nation’s 14.6 million SMBs were responsible for more than $6 billion in locally generated, locally targeted 9interactive advertising in 2008 – more than half of the U.S. total.  And while the smaller merchants spent less than $300 each on Web site support last year, we are forecasting that SMBs will triple this “non-advertising” marketing expenditure over the next few years.  SMBs are collectively poised to plow billions of dollars into their own Web sites.

The owners of small businesses would be well advised to understand these trends as they look to the Internet to help stimulate sales from both inside and outside their market.  Many Internet marketing products are oversold and under perform. Some work well.  And a few work phenomenally well.

Understanding the nuances of online marketing is even more important for local media companies trying to serve this smaller, lower-ticket advertising segment. This report helps identify SMBs and dissects this mass migration toward interactive media.

Hunting the Elusive SMB

During the past two years, as the U.S. economy has slid from a housing correction toward an unprecedented recession, many media companies have shifted their marketing sights lower. Instead of concentrating on the largest American advertisers, these companies have begun to look at smaller businesses. With good reason, too. Smaller firms – those with fewer than 50 employees – comprise 97 percent of the nation’s business population. They employ more than half of the nation’s work force and rang up sales of almost $9 trillion last year.

For media companies and vendors of interactive services, there’s gold in those smaller hills. The question: where to start digging?

Media companies ranging from local newspapers and TV stations to major national interactive pure-plays share a new buzzword: SMB. It stands for small and medium-sized business. There is a problem associated with this new direction, however: no one quite knows how to describe an SMB.  

Targeting the nation’s biggest advertisers is easy. Fortune, Forbes, Advertising Age, Business Week and hundreds of other sources provide detailed lists of them, name their executives, and examine how they spend every dollar earned. There are no such comprehensive data on the rest of the nation’s businesses. They are just … well, smaller. 

Over the past year, several major media companies have asked Borrell Associates for data and ad spending estimates for SMBs. But each has provided a different definition of their target:

• “…between $250 thousand and $5 million in sales.”
• “…under 100 employees.”
• “…$2.5 million or less in sales.”
• “…fewer than 50 employees.”
• “…up to $25 million in sales."

Obviously, each of these criteria yields measurably different results.

Counting the Beans

Borrell’s staff has spent decades examining and quantifying the marketing expenditure habits among U.S. companies of all shapes and sizes. This level of detail is essential to the kind of in-depth analysis of local ad spending we produce. It is a common practice to use sales data for determining how big (or small) a business is. This would be a solid approach IF there were a reliable source of sales data. There isn’t. Sales data, in some cases self-reported, can be wildly inaccurate, often fails to record data from branches or subsidiaries, and becomes even harder to obtain and less reliable at the local level.

Employee counts, on the other hand, are much less prone to error. A strong argument can be made for using employee counts instead of sales revenue to gauge the size of a business, since growth in head count normally indicates growth in sales.  Moreover, employee counts can be used for measuring “tricky” employer categories such as government, banks, and various kinds of agencies (recruitment and advertising firms, for example), where revenue or sales estimates may not be a good measure of actual market prominence.

Figure 1 shows all of U.S. business units through the prism of employee size.  The total shown does not include more than 10 million “no employee” businesses reported by the Census Bureau. These include self-employed writers, engineers, musicians, and other professionals, as well as people who work part or full-time for others as contractors.

FIGURE 1.1: U.S.Business Units by Employee Size Cohort, 2008

_{Source: Dunn & Bradstreet, Borrell Associates; 2009, ©2009 Borrell Associates Inc.}

To understand these totals better, look at the cumulative share of business units, employees, and revenue at each rung of the employee cohort ladder:

FIGURE 1.2: Cumulative share by employee size cohort, 2008

_{Source: Dunn & Bradstreet, Borrell Associates; 2009, ©2009 Borrell Associates Inc.}

Units with fewer than five employees make up the vast majority of the business population. But these smaller businesses comprise only about a fifth of all employees, and less than $1 in every $12 in revenue. The 50 percent threshold for employees occurs at the 50 employee level. For revenue, it occurs at the 250 employee mark.

When Borrell examined these conflicting statistics, it became obvious that one size does not fit all.  The nation’s thousand largest business units (employee size cohorts 11 through 15) are physically present in only a handful of markets.  Their sheer size alone makes any analysis of their media spending habits individualized and unique.  They are outriders in every sense of the term.

There is less variation as employee count shrinks. However, most businesses go through four distinct changes in the way they spend their marketing dollars, as shown in Figure 1.3.

FIGURE 1.3: Media spending variation by employee size

Four Distinct Stages

Stage 1: Businesses in stage one are just starting and struggling to survive. Our research suggests that most businesses fail here, unable to gain enough share of market to remain viable during their first two years of operations. On a per-employee basis, media spending increases dramatically as these new businesses fight to grab enough market power to stay alive.

Stage 2: In stage two, sufficient market share has been gained to guarantee survival. The hunger for share is replaced by attention to service – ensuring the customers gained will remain and that relationships with them will grow. More employees are hired, but – again, on a per-employee basis – media spending drops. This is a comfort zone where almost all businesses that reach it choose to stay.

Stage 3: A few businesses, perhaps one percent of the U.S. total at any given time, choose to fight for greater share. They leave the relative safety of stage two, and enter a bruising fight for regional and national market share. 1Per-employee marketing expense rises again for these businesses, as they strive to compete against larger, more established firms at the regional or national level.

Stage 4: Less than one percent of all business units successfully make their way to stage four. Big work forces and few national competitors mean per-employee marketing expenses drop dramatically.  These giants are the outliers referred to above. Their only real threat is from new ideas that bubble up from companies in stage three who fight to unseat and replace them.

Any useful analysis of business media spending – offline or online – must accurately identify each of the inflection points along the four stage continuum shown in Figure 1.3.  By identifying the media spending properties and mapping the points where per-employee spending changes, small and medium-sized businesses – from a media spending perspective – can be identified.

The Ad Spending Key  

When the nation’s businesses are grouped according to their media spending profiles, the breakout shown in Figure 1.4 emerges.

FIGURE 1.4: Ad sending by media spending stage, 2008

_{Source: Dunn & Bradstreet, Borrell Associates; 2009, ©2009 Borrell Associates Inc.}

Figure 1.5 takes a more detailed look at ad spending variation by media spending stage.  Stages 1 and 3, where businesses strive to gain share and grow sales, show very high indices to the overall average. Stages 2 and 4, where growth in market share is not a major issue, index low.

FIGURE 1.5: Ad spending variation by media spending stage

_{Source: Dunn & Bradstreet, Borrell Associates; 2009, ©2009 Borrell Associates Inc.}

Note the variation in ad spending percent between the stages. It is clear when business units consider advertising spending a necessity, and when they consider it an expense. Using this approach, SMBs can be defined as business units within media spending stages 1 and 2.  Each stage spends its media dollar differently, as shown in Figure 1.6.

figure 1.6: Percentage of Online and Offline ad spending shared by each media stage, 2008

Figure 1.6 looks at the share of all business unit spending by media stage for both online and offline spending. In stage 2, the relationship alters, as the share of online ad spending equals the offline share. This remains the case in stage 3, and the relationship reverses in stage 4. The data show that the smallest businesses – as they fight to survive – have fewer resources (or, just as likely, none at all) to allocate to the technical challenge of interactive marketing. As they grow and survive – and as cost and measurability become important – they turn more attention toward Web marketing efforts.

The Myth of Averages

When all business categories are examined together, it seems easy to develop average measurements that define them. But averages seldom exist in the real world.  If we look instead at specific business categories, enormous differences in these definitions become apparent at once.  Borrell tracks 100 advertiser categories in detail.  These categories are selected because – among them – they account for at least 90 percent of the locally generated, locally spent advertising dollars in every market. Each of these 100 categories has its own media stage profile. No two are exactly the same. As evidence, consider two very different categories: building contractors and general merchandisers.

There are well over a half-million building contractors in the U.S., with an average of four employees per business, according to Dunn & Bradstreet. It is no surprise, then, that the media stage profile for this advertiser category skews far to the small side, as shown in Figure 1.7.

FIGURE 1.7: media stage profile for building contractors, 2008

* Includes both broadcast and cable.  **Includes out of home, cinema, and telemarketing

^{©2009 Borrell Associates Inc.}

Four out of every five contractors are in media stage 1; with an average annual ad spend of under $900. There are few barriers to entry for this ad category. Equipment, if needed, can be rented. A big, impressive office is not a necessity. Most communication and paperwork can be done while driving a truck from one site to another. Employees can be gathered on an as-needed basis, and seldom require tax or benefit considerations. At $3,100, the average building contractor spends less than one-fifth as much on advertising as the typical business unit – a reflection of the low barriers to entry for this ad category. 

The smallest building contractors spend next to nothing on interactive advertising. They may post free liners on Craigslist or another local listing site, but most of their tiny online budgets go toward e-mail marketing. Medium-sized building contractors are a good deal less stingy. The typical unit in media stage 2 probably maintains its own Web site or online directory listing, spends a few experimental dollars on paid search, and buys some ads on local news-paper or TV station sites as well. Direct mail (mostly B2B) and ads in “other print” (e.g., local shoppers, Pennysavers, and niche publications) remain the backbone of the building contractor’s advertising effort. 

Contrast building contractors to an example from another end of the ad spending spectrum, the general merchandiser.  Macy’s, Sears, JCPenney, Kohl’s, Target, and the rest of the nation’s largest department stores are all part of this category, as are the ubiquitous (and enormously profitable) Dollar stores … and, of course, Wal-Mart. 

Severe barriers to entry exist in this category, which partially explains why media stage 1 includes business units with as many as 250 employees, and stage 2 extends to units with 500 employees. These large stores require far more than counter staff. Warehouses, maintenance, inventory control, purchasing, marketing, human resources, and many other specialty staff functions must be brought together and managed effectively for a general merchandise chain – even a small one – to operate at all.

Ad spending shows little differentiation throughout this category because literally every general merchandiser is in direct competition with every other – on a regional, if not a national, basis. Interactive spending is relatively heavy, even for stage 1 units. General merchandisers maintain an extensive Web presence, on their own sites as well as through marketing of all kinds. The amounts spent on interactive relationship management programs, e-mailed with precise messages to store customers is often overlooked but represents a noticeable and growing share of the category’s online spend.

So, while a building contractor with more than 250 employees makes media stage 4, a general merchandiser with the same number of employees is barely in media stage 2. There is no golden rule that applies to all advertiser categories in the same way. The key is how businesses of various employee sizes spend their ad dollars, react to competition, and attempt to grow their revenue.

A table describing the media stage descriptors for each of the 100 advertiser categories Borrell tracks in detail is included as Appendix A.

Now that we’ve pulled out the night-vision goggles and identified the elusive SMB, how do the marketing efforts of this business category affect local interactive media spending? The rest of this report is dedicated to answering this question.

FIGURE 1.8: media stage profile for general merchandise stores, 2008

* Includes both broadcast and cable.  **Includes out of home, cinema, and telemarketing

^{©2009 Borrell Associates Inc.}

What's Happening in River City

If there were an “average” county in the U.S., it would contain about 4,400 business units of all kinds – groceries, gas stations, dress shops, schools, pet stores, a police department, and all of the other kinds of goods and services providers we depend upon to keep our lives in order and satisfy our daily needs. These businesses would employ almost 30,000 people (an average of seven per unit). The average business in our average county brought in roughly $2.5 million in revenue last year.

Of course, as we have seen, the average is only a convenient arithmetic myth. In reality, counties range in business population from Manhattan, N.Y., where more than 152,000 business units averaged more than $11 million each in revenue last year, down to tiny Loving, Texas, where a whopping total of four busi-2ness units with six employees averaged $75,000 during the same period.²

^{2 The four businesses in Loving, Texas: Boot Track Café, County Offices, Hopper’s Gas Station and Endeavor Energy Resources.}

As Figure 2.1 shows, the nation’s 14.6 million SMBs (business units that fall into media stages 1 and 2) spent more than $6.9 billion on locally generated, locally targeted interactive advertising in 2008 – more than half of the U.S. total.  Fifty-four percent of their spending went to “standard format” ads, the pop-ups and banners that preceded all other formats of interactive advertising. Almost a third went to paid search, and smaller amounts to e-mail marketing and streaming audio/video.

FIGURE 2.1: 2008 estimated smb local interactive ad spending

^{©2009 Borrell Associates Inc.}

Stage 1 businesses, for the most part, are less sophisticated and knowledgeable about how to spend their ad budgets. Many tend to advertise more like their neighbors than their competitors. They get little attention from local media companies, and even less from regional or national outlets.  Many ad sales reps – for both online and offline media companies – have historically considered stage 1 businesses more trouble than they are worth, since a call will seldom yield more than a small contract, but with all the service travails of a bigger customer. For the most part, they have been relegated to cursory telemarketing contact.

Perceptions change when a business graduates to media stage 2.  In the first place, these may be the biggest businesses in many markets, so reps from local media outlets give them a good deal of personal attention. Secondly, businesses that market at this level tend to know a good deal more about what they are doing. Many have built their own Web sites, and have doubled every form of interactive marketing spending, compared with their smaller neighbors.

FIGURE 2.2: 2008 smb local interactive ad spending by media stage

^{©2009 Borrell Associates Inc.}

Figure 2.2 shows that the typical stage 1 business in 2008 spent roughly$90 per employee on “standard format” interactive advertising, and about$50 more for paid search.

Per-employee spending by stage 2 advertisers dropped by nearly half, and amounts spent on direct/e-mail and streaming audio/visual were problematic at either level. Many businesses this small spent nothing – or next to nothing – on these interactive ad formats last year. It is important to note how interactive per-employee ad spending decreases as business size increases. There is an up-tick in media spending in stage 3 (not shown here because the businesses in this category are by definition not SMBs) due to the increased need for share building, but overall: the bigger the business unit the smaller the per-employee spend.

SMBs and the “Big 3”

Collectively, car dealers and Realtors make up about one out of every 20 SMBs, but they account for about $1 in $10 spent on advertising by these businesses offline. Although recruitment is not really an ad category (it is, instead, something businesses do to fill job openings and may include many non-advertising activities), recruitment advertising of all kinds made up about one percent of all SMB advertising in 2008.

Auto sales, recruitment, and real estate – the “Big 3” categories − were once the preeminent newspaper classified franchise. Their interactive spending is very different from their offline pattern, as shown in Figure 2.3. Big 3 categories made up almost a third of all SMB ad spending online last year, and smaller auto dealers were responsible for two-thirds of that.

FIGURE 2.3: 2008 SMB offline and interactive ad spending, showing "big" 3 shares

Spending by the nation’s smaller auto dealers comprise seven percent of all offline SMB ad spending – but three times that much of the interactive ad spending SMB pie than they do online. In general, however, smaller businesses allocate little revenue for recruitment – online or offline. Perhaps that’s because a variety of useful venues with free listings – like the ubiquitous Craigslist, for example –make spending money less necessary.

“Big 3” businesses, even the smaller units, were courted early and often by newspapers, as part of the comprehensive “upsell” process that gave them the lions share of local interactive ad spending during the first years of the 21st century.³

^{3 Upsells refer here to online ads that are sold to legacy media (newspaper, yellow pages, TV, radio) customers as an addon to their ad; most of the revenue goes to the legacy medium. Downsells flow in the opposite direction: an online ad is sold to a customer, and for a small incremental fee the ad appears in the legacy medium.}

“Big 3” categories, already portrayed as listings in print, were natural candidates for interactive conversion. As long as there was little competition to worry about, they were easy sales to make, and did little to affect the ad volume of the “core product.” But the Web allowed competitors that had never had an opening before to court these advertisers. In fact, the advertisers themselves became energized to revise efforts that had been limited – in the pre-interactive world – to advertising. Many businesses found that ads on their own Websites could be very effective at drawing good candidates. Realtors began finding online ways of connecting buyers with sellers. Auto dealers began posting their inventories of new and used vehicles for interactive inspection by a growing number of potential car shoppers. For many media companies – especially those dependent on classified listings – it suddenly appeared that the deer had the guns.

The change in what used to be a very large section of most metro newspapers has been quick and dramatic. From 2000 to the end of 2008, newspapers classified revenue dropped by almost 50 percent – from $19.6 billion to less than $10 billion. Print magazines have seen classifieds that once made up five to 15 percent of ad sales dwindle to a shadow of their former size. No wonder some forward thinking marketers are reversing their marketing strategies, and ordering “down-sells” to customers they once lured to the Web with pick-up rates.

The next wave of disruption has begun washing over yellow pages publishers.  As broadband’s “always on” capability and fast speeds make business look-ups on the Web faster than using the printed directory, the books are taking a steep hit. Richer and more current content give online directories a huge advantage over the books. And it certainly doesn’t help that Google has begun listing several businesses, addresses and phone numbers at the top of the search results when anyone types in “Albuquerque plumber” or “Rocky Mount taxidermist.”Our projections call for a 38 percent decline in yellow pages advertising over the next five years, the steepest of any media.

A Walk Down Interactive Main Street

If we took a trip to a mythical community with representative interactive spending by SMBs, we’d find a main street that probably looks a lot like home (see Fig. 3.1).

FIGURE 3.1: smb local ad spending - top 25 us categories, ranked by online share, 2008

^{©2009 Borrell Associates Inc.}

As we turn the corner, there’s the local department store. It’s the largest store in town, but still small compared to the “A” or “B” stores found in bigger cities. Right next door is one of the town’s auto dealers and beside it the local bank.  City Hall comes next.

Across the street, a pharmacy sits next to a mortgage company and a “payday” check-cashing service. An office building holds a local dotcom business, a computer repair service, an employment agency, a chiropractor and an ophthalmologist.  A grocery store, a retailer and a dress shop complete the block.

As we cross a side street the campus of the local community college comes into view. Next to that is the local hospital, and across the street stand a furniture store and a secretarial school. We walk past a sporting goods store and an auto parts outlet. At the top of the block, we see the dish antenna of the local TV station, across from that the town’s oldest hotel. Of course, we didn’t see any recruitment businesses (unless there was a “fry cook wanted” sign in the diner window), but most of the businesses in town do some help-wanted advertising from time to time. All in all, it’s a quiet, bucolic setting – and behind the walls checks are being written that, in aggregate in towns like this across the nation, account for more than half of all local online ad spending.

As Fig. 3.1 shows, the 25 advertiser categories mentioned accounted for 95 percent of the locally generated locally targeted online ad spending throughout the U.S. in 2008. The “Big 3” categories claimed almost a third of the total, when all local recruitment ad spending is considered. General merchandisers, auto dealers, Realtors, banks, and government alone accounted for $3 of every $4 spent.

On average, SMBs spent 11 percent of their locally-targeted ad budgets on interactive media, but some ad categories did far more than that. Dotcoms indexed more than three times the average, and Realtors bettered it by a factor of four. In total, businesses in the top 25 ad categories were almost 20 percent above average, while all other SMBs indexed at 25 percent of the national average...

All in all, our interactive main street may look quiet, but when it comes to local interactive ad spending, it’s where the action is. That may be why local media outlets now pay more attention to SMBs than ever before. Even the smallest business units, the ones media outlets used to disdain, are now on the radar screens of local media.

FIGURE 3.2: online media shares of smb media stage 1 and 2 online ad spending

Pure-plays like Yahoo and Google control almost half of all local interactive ad spending by SMBs, irrespective of their size. Newspaper-owned interactive units follow with a 28 percent share, which decreases slightly as business size drops to media stage 1. The share of spending held by print directory companies’ interactive sales drops as SMBs gain size from 12 percent at stage 1 to 9 percent overall. Only broadcast TV’s interactive sales have carved out appreciable local share of what remains – between 9 and 10 percent overall. The TV stations are relative latecomers, having pushed hard for local share only during the past two years. Before that time, local interactive was almost all the province of pure-plays, newspapers, and directories.

Like newspapers, the yellow pages marketers appreciated the promise of the Web early on. The industry spent two full years retraining its field sales staffs to understand the specifics of interactive products. The giant initiative was seen as a necessity by an industry that saw its share of ad spending drop almost 15 percent between 2000 and 2008, and faces to a decline twice that severe in the years to come.

In the past, directories enjoyed considerable advantage over other media among smaller businesses. For one thing, they always made contact first. After all, the phone company is the first place a business lists itself, even before its doors are open. Moreover, the yellow pages rep could prove the value – the ROI! – that an ad in his book would bring. A bigger ad, an ad with color, a better position – all could be proven to generate more calls, and more calls meant more business.

Small businesses have not deserted the directories. Rather, they have found that they can shave their directory advertising budgets and still not lose appreciable phone call volume. The retrained yellow pages sales force has maintained share of the online pie, but has not grown it, even though the directory sales force is second only to newspapers in the number of local online-trained reps it can put on the street in most markets.  The interactive share “pie” has changed remarkably in four years. In 2004, newspaper share was more than 50 percent, directory held double digits, broadcast TV was barely a visible sliver, and pure-plays languished at about 20 percent.  SMBs, once considered customers nobody wanted, are now fought over like their bigger neighbors.

More Goes Toward "Non-Ad" Marketing

In 2008, more than 60 cents of every SMB local marketing dollar was not spent on advertising (see Figure 5). Instead, the spending was directed to “non-ad” categories that include trade shows, ad production, public relations, market research, sales force support and – bigger than any of the rest – promotions. This does not include more than $150 billion provided by national sources to support their stores, branches and subsidiaries. It counts only what was locally generated and locally targeted.

On the local interactive side, “non ad” spending was still taking baby steps last year. As Fig. 4.2 depicts, less than eight cents of every local SMB interactive marketing dollar went to “non-ad” spending.

FIGURE 4.1 - smb ad and "non-ad" share of 2008 local marketing spend

FIGURE 4.2 - SMB AD AND "NON-AD" SHARE OF 2008 LOCAL MARKETING SPEND

The biggest portion of this interactive spending was for public relations. Back in the days before the World Wide Web, “PR” was mostly something that larger businesses paid for. They could afford to hire agencies to place their marketing messages in publications or with broadcasters as content, not advertising.

The interactive platform has reinvigorated public relations and opened the door for amateurs to try their luck. Press releases can now be broadcast around the nation and the world via the Web and e-mail. Depending upon the topic, and how much a submitting business is willing to pay, they may get top billing– for a time at least. Other services, like search engine optimization, try toensure that searches for a popular topic automatically guide the searcher to a specific business Web site. The results of such work can be amusing (or annoying, depending upon your point of view), as when some searches for the name of one political candidate last year were routinely “hijacked” to the site of another.

FIGURE 4.3 - smb 2008 local ineteractive "non-ad" spending - Share by category

At almost half of every marketing dollar spent, promotions is the single biggest element of marketing expenditures among all businesses. Yet it is still embryonic in SMB local online spending, accounting for only a third of the 2008 total.  Promotions takes many forms, from contests and sweepstakes to coupons and point of sale displays – but by far the biggest portion of it is simply money.  From the neighborhood grocer’s nickel off every can of peas to thousands off the price of a new car – discounts, rebates, free shipping and other “price off” strategies make up the lion’s share of every promotions budget. As we will see in the next chapter, local interactive promotions spending won’t stay small forever.

The Future of Interactive Main Street

During the next five years, SMB local interactive ad spending is forecast to grow by almost 10 percent, from $6.9 billion to $7.5 billion. During this period, SMB share of all local interactive ad spending will drop from about two-thirds of the total pie to about half (see Fig. 5.1). But big-picture figures can be misleading. While overall spending increases slightly, the growth in certain interactive advertising buys increases dramatically.

FIGURE 5.1 - Forecast smb local interactive ad spending by ad format

^{©2009 Borrell Associates Inc.}

The major culprit affecting these forecasts are the change in “standard format” or banner-type ad spending among the nation’s smallest businesses. If this format is removed from the calculations, SMB spending grows a much healthier 18 percent in 2009, and almost doubles by 2013. Instead of decreasing by 6 percent, as local banners are forecast to do this year, spending among SMBs in this format drops 9 percent. On the other hand, spending on e-mail marketing and paid search increases faster than the total for all businesses this year.

By 2013, the spending habits of SMBs are likely to be very different than today, when their interactive buys consist of mainly banners and paid search (accounting for 85 percent of their interactive advertising). In five years, 68 percent of their spending will be on paid search and video. Spending on standard format advertising, which today accounts for 47 percent of all SMB interactive spending, is expected to account for less than 19 percent by the end of 2013.

The Leapfrog Effect

As we’ve seen, the smaller business units have not paid as much attention to online marketing in the past as their larger neighbors. As such, they have not adopted the same media buying habits. Instead, they will tend to “leapfrog” the practices of businesses with more history, moving to newer formats more rapidly.

It’s a move everybody is making, at one rate or another. As part of their annual “Marketing Priorities and Plans” survey, B@B magazine asked more than 200 marketing professionals, “For the following media, what are your spending plans for 2009?” The answers are shown in Figure 5.2.

FIGURE 5.2 - 2009 spending plans for selected media choices

Only a third of the marketers interviewed announced plans to increase spending on banners during 2009, while the overwhelming remainder plan to either cut spending or leave it unchanged. Spending on e-mail marketing showed exactly the opposite trend. Other research finds the same direction. Datran Media has conducted its “Annual Marketing & Media Survey” for the past three years among more than 3,000 industry executives and agency managers. Each year respondents were asked: “Which advertising channels perform strongly for your company?” The results are shown in Figure 5.3.

FIGURE 5.3 - Selected advertising channels - percent saying "perform strongly for my company"

These surveys and other research indicate that media planners from businesses of all sizes do not believe the classic “standard format” interactive ad format per forms as strongly as other formats – specically, e-mail marketing and paid search. A growing number are choosing to reduce spending on “standard format,” in favor of these formats or streaming audio/video. SMBs, perhaps newer to interactive advertising than their larger neighbors, are poised to move straight to these more effective formats.

The forecast for SMB interactive spending shows a decline in local “standard format” ad spending of 6.1 percent this year, even though all U.S. businesses will increase their spending in this format an average 35.2 percent. Increases in paid search and e-mail marketing expenditures are greater than average.

FIGURE 5.4: 2008 to 2013 Change in smb interactive marketing spending ^{($ in Millions)}

^{©2009 Borrell Associates Inc.}

As we have seen, however, ad spending is only part of the picture. If we look at all spending on interactive marketing, SMBs are currently forecast to increase 24 percent during the next five years – from $7.4 billion to more than $9 billion.  The bulk of the increase will be due to “non-ad” marketing, which is forecast to more than double. As a result, the percentage of ad spending in the typical SMB local interactive marketing budget will fall from last year’s 92 percent to 82 percent in 2013 (see Figure 5.5).

figure 5.5: Change in smb local interactive marketing budget, 2008-2013

No Laughing Matter

This change in emphasis will grow even stronger during the rest of this century’s second decade. It is a part of a growing demand among businesses of all sizes for proof of utility in marketing efforts – for ROI, accountability. In the old, pre-Web days, business owners would say with a laugh, “I know half my advertising doesn’t work, I just don’t know which half.” Nowadays, they aren’t laughing.

The blurring borders between what is advertising in the interactive world and what is not add to the shift to “non-ad” marketing. Businesses large and small –but especially the smaller ones – don’t even try to make the distinction. To them, whatever they spend or do on the Web is advertising, whether it goes through an intermediary or not. As proof of this disintegrating distinction, when marketing professionals were asked by B@B magazine which media they intended to spend more money on in 2009, about two-thirds (66.3 percent) said “my own Web site.”

Where the Money Goes: "My Own Web Site"

Because many businesses – especially smaller ones – don’t differentiate well between what they spend on marketing and what they spend on their own Web sites, it is worthwhile to examine that side of the SMB picture. The average SMB spent less than $300 in 2008 to support its Web site (see Fig. 6.1). Spending was not equally divided, however. The smallest SMBs spent an average of about $50. Their larger cousins spent 12 times more. These miniscule amounts are skewed a bit by the fact that many sign up for templated plug-and-play Web sites such as those offered by VistaPrint ($4.99 a month) Sam’s Club ($10a month) and CityMax ($19.95 a month), while others may opt for more professional design and ecommerce features that costs thousands of dollars.

FIGURE 6.1: Web Site Support spending for smbs

^{©2009 Borrell Associates Inc.}

Many of the nation’s smallest businesses still don’t have Web sites of their own – as much as 44 percent, according to some surveys. Their Web presence is often limited to a listing in an online directory or an ad running on the site of one of the local media outlets – the local TV station or newspaper. So, when compared to all businesses, spending by SMBs seem to be in reverse order, with the bulk of interactive spending going toward advertising. On average for all business units, 80 cents of each Web-directed dollar goes for Web site support instead (see Figure 6.2).

FIGURE 6.2: smb web spending compared to all u.s. businesses

The disparity is likely to change. As the shift in consumer dependence from “legacy” information sources to Web-centric replacements continues to climb, even the smallest Main Street business will be obliged to create some Web presence – just as their predecessors found yellow pages listings indispensable.

A recent study conducted jointly by WebVisible and Nielsen//NetRatingsfound that 73 percent of a national sample of adults answered “Internet search engines” when asked what sources they use “to find a local business from which to buy.” This answer was higher than any other source, including yellowpages directories (65 percent), “your local newspaper” (44 percent), and television (29 percent). Respondents also said they use the Internet more than they did two years ago (78 percent). Only six percent gave the same answer when asked about telephone directories.

Currently, SMBs spend more of their online services budgets on online service providers, and far less on the services of online technology consultants (see Fig. 6.3).

FIGURE 6.3: online services spending by category - smb vs. all u.s. business units ^{($ in Millions)}

^{©2009 Borrell Associates Inc.}

Tapping into the growing demand for services to support Web presence among the businesses on interactive Main Street could prove lucrative. They will certainly need the help, unless they want their share of voice in the markets they serve to be drowned out by franchisees and bigger competitors.

Conclusions & Recommendations

Small and medium-sized businesses are just beginning to take advantage of interactive marketing technologies and are making major shifts in how they invest their marketing budgets. This makes them one of the largest areas of opportunity for media companies. For both sides, the keys to success in the interactive marketing arena will include an understanding of the spending patterns that prevail for each size and type of business.

The first step in developing an effective strategy around SMB marketing is to define what “SMB” means on a category-by-category basis. By defining SMBs on the basis of employee size within each business category, media companies can get a better handle on the patterns of their prospects’ marketing and advertising spending. This in turn will increase the efficiency of their sales efforts by helping them define prospects more carefully and design product and service proposals that are appropriate to the prospect’s media spending stage. Blindly targeting SMBs with interactive offerings that overshoot their spending capabilities is a sure-fire way to fail.

The next step is to understand the natural tendencies of businesses in each stage of growth, and learn to recognize where a business is in that continuum. Try to determine whether a business is attempting to migrate to the next level; this will impact its expected spending behavior.

SMBs that may have been on the sidelines can skip some of the evolutionary steps that their larger competitors have taken in the development of their interactive marketing strategies. Rather than starting by investing in banner ads as its more advanced competitors may have done, a small business that is just getting started on the Web can jump straight to e-mail, search and video ad formats, and employ promotion techniques that emphasize database marketing, bypassing strategies that have been outmoded.

While the pot of gold may seem enormous, the journey isn’t for thin-walleted companies looking for a rush-to-riches sales plan. Spending levels are low and expectations have to be managed well.  The winners will be the ones who deliver a) a dynamic sales pitch for b) a well-timed product that is c) appropriately priced and delivers d) the promised results.