Borrell Associates, Inc

JUNE 2009

Addressing the Challenges of a Scalable Local Online Advertising Model

Research & Analysis Underwritten By:

Clickable

ECONOMICS OF SEARCH MARKETING

We would like to thank Clickable for its eagerness to help media managers understand the critical metrics of the SEM industry and, ultimately, to help local businesses achieve greater efficiencies in reaching consumers. We are also appreciative of the many industry executives and front-line local SEMsales reps who contributed greatly to our knowledge of this evolving landscape.

Borrell Associates Leadership Team:

Contents

Introduction

The Search Engine Marketing marketplace has become like a boisterous carnival, overcrowded with people trying to elbow in on the excitement, but inevitably a place where many end up feeling hoodwinked and fleeced.

Yet SEM is by no means a scam. It swelled to an $11.5 billion business in 2008 on the fingertips of millions of wallet-ready consumers researching products and services. The rise of broadband household usage and its “always on” capabilities have given consumers yet another opportunity to shave a few seconds off their busy days by turning to the computer to search for a business phone number or address. Today, five times as many people use search engines on a regular basis than they use the yellow pages to find a local business.

The economy has accelerated this mediamorphosis. Advertisers – especially the Small and Medium-Size Businesses (SMBs) are glomming to search advertising. The harsh economic environment has caused them to re-evaluate longstanding practices of relying on Yellow Pages, newspapers, radio and Direct Mail to reach consumers. Over the next five years, their ad spending on these four legacy media alone are forecast to fall 19%, representing average annual declines of $3.4 billion. Meanwhile, spending on paid search by local advertisers is forecast to rise 39%, representing average annual increases of $242 million. Other interactive media that affiliated with search and directory advertising – namely video and email – are forecast to increase at triple-digit rates by 2013, adding $1.1 billion per year to interactive media spending.¹

The problem is, the quick emergence of the multibillion-dollar paid-search industry has spawned unrealistic expectations among local businesses eager to turn the Web into a cash register – and a cottage industry of companies eager to bolster that dream. SEM has no doubt been oversold and mismanaged by resellers, leaving many local businesses disillusioned with a product that holds so much promise. Churn rates are embarrassing for these resellers. Most of them lose half their customers within a year’s time. Some lose as much as 90 percent.

Yet the horizon is incredibly promising. Approximately two-fifths of all small businesses still don’t have a Web site, and the forecast growth in search-engine marketing by this sector is expected to be 39% over the next four years. The opportunity is tantalizing for traditional media companies eager to jump on the bandwagon. Local media companies have more²than 102,000 sales reps – half of whom work for Yellow Pages or newspaper companies. Many have partnered with search advertising vendors to become local resellers, training their sales forces to reach SMBs . . . and inevitably adding another layer of costs for the advertiser to bear.

Amid this hubris, is the SEM business about to collapse? Hardly. In fact, it has yet to scale. This 8-year-old child prodigy offers advertisers a powerful way to reach potential customers directly, bypassing ad agencies and online media. A critical feature is therefore its empowerment of the advertiser through the ability to change the reach and parameters of the search terms. Making informed decisions, though, demands knowledge – responses, costs, options.

¹Source:Borrell Associates Inc. 2013 media spending forecast.

²There were approximately 101,900 sales reps in 2008, broken down as follows: Newspapers, 36,200; Yellow Pages 16,000; broadcast TV 9,850; radio 18,150; pure play Internet companies 2,400; cable 4,000; other media (local magazines, direct mail cos., etc.) 15,300.

Sources: Bureau of Labor Statistics, Borrell Associates Inc., Dec. 2008.

What the industry desperately needs are analytical tools that advertisers can use to assess and recalibrate how they spend their ad dollars. Clickable, a leader in this field, has commissioned this research in an effort to lay out the critical issues facing the SEM marketplace and help local marketers identify key requirements of SEM management solutions.

This report discusses the economics of search advertising in the context of ad spend management, and in particular how service providers working with vast numbers of smaller businesses can drive growth and profit for their clients and themselves.

In particular we examine:

• The role of SEM in the advertising landscape
• The role of SMB service providers
• What makes a successful reseller program?
• Churn rates for service providers for this sector
• Break-even customer spending thresholds for existing SMB providers
• Demand for premium services

Based on the findings, the report then outlines:

• The “future sustainable business model” including technology and commercial options (including platforms, partnerships, exits)
• Client migration path from SEM services to premium vertical services and to grow their client base from smaller to large/more profitable clients

Chapter 1

Advertisers annually spend about $265 billion across 11 different types of media to reach U.S. consumers. While the expenditure has grown fairly consistently throughout the 20th century, a steeper-than-usual contraction began emerging at the turn of the new century. This was due to a growing number of lower-priced choices of targeted advertising, and it was spurred by two economic downturns over the past eight years that continue to force businesses to rethink the way they spend their marketing dollars.

As a result, total offline ad spending is forecast to contract by an unprecedented 6.6% over the next half-decade, from $229 billion last year to $214 billion in 2013. Some will be due to natural a contraction in ad spending as advertisers migrate to less-expensive media with greater ROI, while a greater share will be due to a migration to online media, where advertisers are finding that their ad budgets can be deployed more effectively.

an ad was seen, and it helps satiate a longstanding desire to pay for something only if it actually works.

It’s difficult to believe, but the SEM industry didn’t even exist nine years ago. Paid search now represents a stunning 4% of all advertising expenditures across the U.S. and nearly one-third of all online advertising. This year, businesses are expected to spend more than $11 billion on search advertising. And that doesn’t include perhaps as much as $2 billion more they will spend on technical and consultative services related to improving their rankings in the search engines.

While national advertisers were the first to glom to the idea of renting keywords on Google and Yahoo!, the new frontier is most certainly local advertisers – particularly the small and medium-size businesses, or SMBs. Locally placed search advertising in the U.S. is projected to grow 29.5% over the next five years, from $4.1 billion in 2008 to $5.3 billion in 2013.

Figure 1.1: $15 Billion in Annual Spending Shifts from On;ine to Online Advertising by 2013

© 2009 Borrell Associates Inc.

Fueling perhaps the largest migration toward targeted advertising is Search Engine Marketing (SEM). The magnetism of pay-per-click advertising is undeniable. For the advertiser, it leaves behind the nagging question of whether The mass migration toward search is wreaking havoc with the SMBs’ traditional “targeted” advertising channels, particularly Direct Mail and Yellow Pages, both of which are projected to see ad revenues decline of approximately 38% over the next five years. Idearc has filed for bankruptcy protection, and R.H. Donnelley may do so amid the mass migration from print directories toward SEM and other advertising channels.

Yellow Pages companies, along with newspapers, have rushed to add search-based offerings to their advertising buffets. Together these two media control about half of the approximately 102,000 local media sales reps in the

U.S. They have spent the past three years intensely training their sales reps to sell Internet-based products, including search and directory advertising.

Where do consumers turn first to find a local business?

According to a recent Nielsen Online survey, 50% of consumers surveyed said they turn to search engines to find a local business, followed by yellow pages directories at 24%, Internet-based yellow pages directories at 10%, local newspapers at 4%, and white pages directories at 3%.

The survey found that consumers use search engines 72% more than they did two years ago, when a similar survey was conducted.

Nielsen Online/WebVisible survey, Feb. 2009

The success has been most obvious among the Yellow Pages companies, who now get an average of 10% of their total revenues from interactive sales, mainly directory listings and SEM products. Newspapers companies, meanwhile, average 7% of their gross revenues from interactive sales and have just recently begun adding SEM products to their offerings.

SEM products drew strong attention from media companies and other potential resellers last year as the direct resellers – sales companies such as Local.com, LookSmart, ReachLocal and Yodle – saw high double-and even triple-digit in revenue growth.³ The list to the right highlights in yellow the companies who relied heavily on SEM sales in 2008. In aggregate, these companies experience a 33.1% growth in revenues in 2008, a notable achievement in a year where overall advertising expenditures dropped dramatically for most media companies.

While growth is high, the longevity of these programs under their current model is suspect. Enterprise-level SEM clients who are managing massive customer lists and local-market resellers alike are struggling with profitability and churn. The question is, can this growth continue under a current sales model that either delivers little to no profits or, more likely, requires companies to peel dollars away from the advertiser’s total media spend in order to make a profit? As will show later in this report, a “sustainable” business requires an investment in a sophisticated SEM management platform and earmarking appropriate levels of spending toward the media buy.

Players In the Local Online Advertising Marketplace

It’s important to understand the players in the SEM marketplace. At the center of the equation are perhaps a half-trillion links and approximately 220 billion clicks.⁴ When a consumer clicks, it generates a payment. At the top of the food chain, of course, are Google, Yahoo! and MSN. There is also a plethora of other smaller local and vertical search engines, all participating in an inbred family that trades contextual ads, links, clicks and money.

³Yodle, Local.com and Machex had revenues of between $24 million and $40 million each; ReachLocal does not disclose revenues or growth figures, except to say that 2008 revenues were “well north” of $100 million

⁴Assuming there is $11 billion spent on search advertising, and each click is worth 5 cents. (11 billion / .05 = 220 billion clicks.

At the next level are those who actually buy the keywords, whether directly or indirectly. This group is comprised of three main players:

• Direct Buyers.These are businesses that create an account directly with Google, Yahoo! or the others and purchase keywords and manage their own campaigns. The churn rate from direct buyers is said to be about 50% per annum.
• SEM Resellers and Technology Providers. These are the “platform” companies that provide search-management software and purchase keywords either directly for advertisers, or provide the platform to affiliate marketers who sell direct. Yodle, ReachLocal, LookSmart, WebVisible and Marchex are examples. The annual churn rate for resellers is said to be about 60%.
• Affliates. These are the local-market sales forces that contract with the resellers and technology providers. They mark up the product to compensate for sales commissions and profit and then sell direct to local businesses. They range from individuals who act as franchisees to large media or credit card companies with massive customer lists. The churn rate for affiliates is said to be 70% or higher.

Chapter 2

Direct SEM buying and management is not for the faint of heart. For a small, local business owner, it may seem like instant gratification to create a Google account and bid 55 cents on the term “peanut brittle,” then type in those words on Google and see your text ad for Betty’s Gourmet Peanut Brittle. But what about “gourmet peanut brittle,” or “buy peanut brittle,” or “peanut candy”? Other nagging questions arise: Sure I’m getting clicks, but are competitors clicking on my ads? People in China? Those so-called “bots”? How many clicks actually convert to sales? And why do competitors appear in the organic results without having to pay per click?

Meanwhile, stories about click fraud abound. Earlier this year, Click Forensics released its latest pay-per-click (PPC) fraud figures showing an increase from 16.0% in the third quarter of 2008 to 17.1% in the fourth quarter. On the content networks, where many of the resellers rely on ad placement, the click fraud rate was 29%.

Enter the SEM resellers – the “experts” with all the answers. These intermediaries have been able to simplify – some would say oversimplify – SEM for local advertisers. They typically sell packages that include not only SEM, but also SEO and, in many cases, Web site design, hosting and maintenance. Some have created their own networks of traffic and content, in effect becoming sellers on their own search networks in addition to reselling traffic across the Googles and Yahoos of the world. Companies such as Local.com, Yodle, ReachLocal, WebVisible, Orangesoda and Marchex have been picking up hundreds of new customers per month. Local.com, which had about 5,000 “direct” advertising clients in 2008, is well on its way to attaining 50,000 by the end of this year.

What makes a viable reseller or affiliate business? Interviews with executives at some of the major resellers and their frontline sales affiliates suggest these key features:

• Scale and size. They need to be able to manage thousands of accounts because of lower price points, high customer turnover, and the greater potential for profitability at higher volumes of business.
• Efficient customer acquisition channels. They need to go beyond the “enterprise” customers who might spend tens or hundreds of thousands of dollars per month and tap those spending only a few hundred dollars. Of the estimated 15 million businesses in the U.S., 89% of them have fewer than 10 employees. Reaching these businesses and selling them on SEM products will require sales and marketing affiliations – or a massive “direct” sales staff – across many local markets or regions. Having one sales rep per 1,000 clients – as the executive of one reseller company said was the metric they use – leaves little time for customer care. If that rep called each client just once per quarter, it would require 15 phone calls per day.
• Deep technical proficiency. They need to be able to manage multiple campaigns effectively and deliver outstanding results in an understandable format. Anyone can learn the language, create an AdWords account and buy keywords for advertisers; the successful resellers will need to exhibit a strategic competitive advantage in the form of an unmatched technical prowess in the SEM industry.

Several search engine companies require resellers to meet those scale/size/technical and certain other criteria before allowing them to represent and work with them. There is some flexibility here, as a reseller can chose to partner with another company if it doesn’t provide one of the components.

Technology is obviously critical to success, because it is what differentiates players in this market. SEM depends on being able to offer advertisers access to multiple search engines, along with conversion tracking and dashboards or similar comparative ad management tools. And size matters, because the great majority of search advertisers spend very little. Service providers therefore need a high volume of clients or high-spenders, including agencies – preferably both.

But technical prowess is no guarantee of success. According to Kim Peters, CEO of the recruitment search engine Eluta and a former head of Workopolis and Working.com, SEM businesses face a key barrier to success: lack of education within the community of potential customers. What this means in practical terms, she says, is that while there is value in these services, resellers are dealing with small businesses with little or no expertise in marketing, and no one really responsible for ad budgets.

What Peters believes these smaller businesses need is to try search engine marketing, and hopefully find that it works, before moving on to optimize their investment and increase their spending levels. It is probably only at that stage that more sophisticated solutions will be attractive, and certainly an inflection point where resellers and affiliates alike will need to achieve optimum efficiencies that produce dynamic results for the advertiser.

Addressing Churn

There are two fundamental barriers to making money from SEM from the high-growth smaller business sector: typical ad spends are low, and customer churn⁵ is high. While none of the resellers wants to disclose specific churn rates, our interviews with them led to the conclusion that annual churn – or the percentage of total advertisers who go inactive or exit the program after 12 months – for the major resellers is close to 60%. For the poorest performers, which include some of the smaller, less sophisticated resellers, we found:

• 6-10% a month attrition on gross customer count
• Up to 50% quit by 90 days
• Up to 90% quit within 6 month
• Churn is caused by many factors, but one of them may be directly proportional to a reseller’s business stage – or at least its internal strategy. Those with greater focus on acquisition of clients might experience far higher churn rates than those focused on preserving their existing customer base. Kevin Hillstrom, president of MineThatData, recently published his Multichannel Forensics framework, arguing that monthly churn rates translate as follows:
• retention mode (60%+ annual retention) = less than 4% monthly churn
• hybrid mode (40%-60% annual retention) = 4% to 7% monthly churn
• acquisition mode (0%-40% annual retention) = more than 7% monthly churn

The goal, obviously, is to move as swiftly as possible to retention mode – something the venture capitalists and public markets that fund many of the resellers demand. It goes to credibility and attracting new business, and drastically reduces cost of sale. And, as Peter Hutto, vice president of business development and sales for Local.com, notes, companies need to keep the advertiser for at least four months to break even.

Many resellers have stated publicly that their churn rates are far lower than what is being reported by the front-line affiliates or resellers. This may be due to a definition of churn being monthly instead of annual. For instance, one major reseller says its average churn rate is 35-40%; this breaks down across its affiliate reseller groups as follows:

• Yellow Pages 35%
• Newspapers 20-25%
• Small Business Aggregate 50%+
• Small Businesses 30-35%

Using data points compiled from interviews with 15 resellers and affiliates, we developed a “typical” model seen in the reseller industry that is both startling and disturbing. In this aggregated model, the reseller business closed 1,000 new SEM accounts per month and saw monthly churn rates ranging from 5% at the early stages of the sale to 45% at the end of a six-month contract. Overall, the business signed 12,000 contracts over the 12-month period, only to see 9,750 of them cancel.

At those rates, it’s a short-term business. We don’t expect these companies to survive without radical reformation of their business models.

There are two reasons for churn. Most advertisers quit because they don’t see quantifiable results or sufficient Return on Investment (ROI) from their ad spend within 90 days, and some suspect that their service provider is taking too much off the top rather than directing most of their spending toward keyword purchases. While this is difficult to verify, it may have some basis. Marchex, one of the largest resellers, reports a gross margin of 55% in 2008, suggesting that the amount spent on keyword purchases is south of 45%. To be fair, however, Marchex and other resellers charge for services that go beyond pay-per-click advertising – such as landing pages, SEO services and even display advertising placement.

⁵ Churn is defined as the percentage of total advertisers that cancel contracts after a given period of time. Churn rates can be described in annual terms or in monthly terms.

This changes with the higher levels of spending by the advertiser. Our model, based on interviews with advertisers and resellers, indicates that at the highest levels of spending – above $50,000 per month -- an advertiser will see 89% to 94% of the expenditure applied toward keyword purchases. Conversely, those spending the lowest amounts see less than half their dollars used to purchase keywords.

If this is correct it points to a relatively high additional cost to advertisers that might reasonably have them wondering whether they really are getting added value from using a reseller. It’s likely, then, that the reseller with the most customers and highest retention, and the lowest volume rates, will be most likely to survive.

Once again, it appears that achieving the appropriate level of scalability is the linchpin that can hold the massive SEM machine together as it rumbles forward.

What the service providers provide (beyond keyword buys)

The role of the service provider in this context is to manage search advertising so as to maximize ROI for the client. There are many variations on the theme. Companies in this space typically offer a mix of campaign management and technology solutions (proprietary and/or licensed) while others are primarily resellers. All offer tracking information for their campaigns so that they can prove to their clients that what they're doing works.

Here are a few examples of what these companies provide:

Yodle – A mid-size provider with 2008 revenues estimated at $24 million, Yodle experienced the highest growth rate across its partner network.

WebVisible – WebVisible is a privately held company that sells direct to advertisers and works through an affiliate network that includes Yellow Pages publishers, newspapers and online service providers. It offers two main product types and uses 30 different search engines. Companies can license WebVisible’s Geneva 3.0 product, a software platform that helps its clients manage SEM campaigns. The license allows businesses to create and sell their own platform without having to create a robust software system.

Marchex – A publicly held company, Marchex reported $146 million in revenue in 2008 and more than 300 employees. It has more than 70,000 advertisers using its products. It deals with direct advertisers and with affiliate publishers such at Business Week, MotleyFool, AT&T‘s Yellowpages.com and Barrington Broadcasting. Marchex offers a local content network that spans 150,000 geocentric sites, including local networks such as CitySearch and sites and tens of thousands of its own niche sites such as DenverAutoRepair.com, BostonVeterinarian.com and ZIP Code-based domains like 90210.com.

Clickable⁶– A privately held company that was founded in 2006, Clickable’s mission is to make search advertising “simple, instant and profitable.” It does so through a white-label solution that helps marketing services companies deploy large-scale online advertising programs to their local customers under their own brand. Clickable’s platform delivers tools to manage lead generation, offers self-manage advertising dashboards, and offers a suite of reporting, support, training, community, billing and full CRM integration.

Borrell Associates researched and authored this report with Clickable’s assistance. Clickable is the sponsor of this report.

Chapter 3

As we’ve identified, despite the excitement and growth in the SEM industry, churn is the elephant in the room. Though we may dissect the instigators of churn – less money devoted to keyword buys, poor or unquantifiable results for advertisers, greed by the affiliates or resellers – the single biggest issue is the sales approach. Are reps selling (and many of them are) a “bucket of clicks,” or are they selling an advertising package that includes various media aimed at generating leads? As one affiliate told us, a reseller/platform provider pitched the viability of its SEM program by claiming, “You can pocket 50% of the margins!”

Key questions for affiliate marketers, then, might be:

• Does the SEM platform have us selling traffic, or conversions?
• Does a white-label program offer room to align the goals of the business with the performance of the product?
• Can the platform deliver a way to optimize the performance of the advertiser’s keywords?

If churn is one side of the profitability coin, then customer spending is the other. The bottom line is that, as outlined in Chapter 1, lower levels of monthly spending (below $500) equate to less amounts that can be devoted to buying keywords . . . thus increasing the likelihood of customer dissatisfaction.

There are two aspects to this. Critical to break-even is actually making the sale in the first place. This gives rise to a tension that afflicts any enterprise trying to sell to the SMB sector – how can you motivate sales reps on sticker prices low enough to appeal to the customer? This isn’t confined to SEM service providers. A major north American portal explored telesales as a way to market a self-serve online display advertising concept for small businesses, because regular commission reps could not be given adequate incentives. In another instance, a Canadian news aggregation service eventually withdrew a scaled-down SMB product because its sales force, accustomed to commissions of 10% to 15% on $1,000-a-month products, were unwilling to push an option priced at a small fraction of that.

Advertisers interviewed for this report stressed that while adherence to budget is key, it tends to be more of an initial than an ongoing concern if the ad campaign is successful. This in turn depends on WHY someone is advertising. The head of one start-up company told us:

“We know exactly how many unique visitors come from SEM versus organic SEO versus typing in the URL, etc. We have a set budget for SEM. But there’s no magic number we look to hit just to get as much traffic as possible for the investment. . . SEM tracking services are most helpful when you can actually complete a transaction when someone clicks on the ad.”

The break-even point is a moving target because there are so many underlying cost elements. With Google’s reseller program, for instance, partners who bring in a high amount of customers get a rebate of 8-12%. Some resellers factor this into the rate charged to customers. Yahoo! is believed to be more aggressive on this front, paying up to double what Google was rebating (no-one calls this a commission) in return for a commitment to a certain level of ad spending by the reseller.

The economics of this first wave of SEM have cast a questionable veil on the industry, but the second wave is seeing a greater deal of movement away from greed and toward a more sustainable business model.

Local.com made a decision not to get into the game of working with affiliate resellers, explaining:

• The business is desperately competitive because there is only a narrow band of qualified customers.
• Resellers call on small businesses that can spend maybe $250-$500 per month on search.
• It’s difficult to make a significant amount of money being a reseller. They either must charge an agency fee or have a “click arbitrage” to generate money, and re-sellers don’t get a discount or much back from the placement company (Google, Yahoo!, etc.).
• According to several SEM executives, this is where the money goes on a monthly client spend of $1,000:
• Media cost 55%-65%
• Cost of sale 15%-20%
• Product/Technology cost 20%-25%
• Profit 5%-10% (or no profit at all)

It’s not only a hard way to make a living, but is also compounded by churn.

Advertisers don’t have much loyalty and will switch providers quickly if there is a cheaper alternative or if they’re disillusioned with the results. For the SEM provider, it’s easy to become trapped between acquiring small-business customers, which are a hard sale at a low price point, and large businesses that may be an easier sale but more expensive to service.

As described in Chapter 2, however, the “high growth” customer-acquisition phase is typically accompanied by high churn, especially for the lower-spending customers. We’ve developed a model based on interviews with advertisers, search engine executives, and SEM resellers that exhibits the differences in churn using three variables:

1. Churn rates – the percentage of total advertisers that cancel in a year’s time.
2. Number of SEM clients being served, from 500 to 50,000.
3. The use of SEM management software, which involves a sophisticated analytics and reporting program like that offered by Clickable and others.

The model shows the steepest level of churn for resellers attempting to manage 5,000 clients without sophisticated SEM software. The drop off in churn after that level – while counterintuitive – actually indicates that companies managing more than 5,000 clients are forced to employ systems that do a better job of managing customer relationships and expectations. Still, without sophisticated SEM management software, annual churn rates still remain above 50%.

Chapter 4

Search advertising continues to grow exponentially. For resellers and affliates, the potential is huge. But it is also challenging. The great majority of advertisers have low monthly ad spends, often of only a few hundred dollars and sometimes less. Likewise prospective advertisers, those not yet converts to this genre. Capturing clients therefore involves a heavy initial investment, trying to persuade small businesses not just to advertise but to do so through an intermediary.

Economically this will not make sense unless there is demonstrable added value. Even then, loyalty is in short supply: churn rates nudge 60%, with most of the attrition by the third or fourth month. Industry insiders say that it is only after that period that an account starts to be profitable. And as 80% may be are gone within 12 months, this means trying to make enough money on:

• maybe 30% of clients for what might be just two or three months
• and another 10% slice still on the books after six months
• to offset the costs of procuring and then losing those who churned
• ….as well as actually run the company and try to make a profft!

It’s clear that a sophisticated SEM management software solution – like that offered by Clickable – is vital for local affiliates and for enterprise-level providers managing thousands of accounts. It provides a level of efficiency that can a) drive customer performance, thus b) reducing churn and, c) increasing profitability.

Using the models we’ve developed in this report from frontline experience by resellers and affiliates, we’ve concluded that increasing the media buy from 55% to 65% of the advertiser spend will result in a 20-point drop in churn and a resultant 31% increase in profits. Figures 4.1 through 4.3 illustrate examples based on a scenario of closing 1,000 customers per month on an average per-customer monthly spend of $500. At the “enterprise” level with higher-spending customers ($5,000 to $10,000 per month), the results hold up much the same even though there are significantly lower numbers of closed sales and higher profit margins.

Service providers that can assist in managing search advertising by optimizing the efficiency of the ad spend can help address churn and, because the retained clients will see the benefits of their advertising, gradually nudge up the spend. But although there are additional costs, they can be instrumental in maximizing reseller and their own revenues in a business model based on retention and rising volume.

Assumptions:

• 1,000 account sales/mos.
• Customer spend $500/mos.
• Annualized churn 81%
• Cost allocations:
  • 55% keywords
  • 20% sales comp.
  • 20% product cost
  • 5% profit

Result:

* $655,670 profit after 12 mos.

Assumptions:

• 1,000 account sales/mos.
• Customer spend $500/mos.
• Annualized churn 71%
• Cost allocations:
  • 60% keywords
  • 18% sales comp.
  • 17% product cost
  • 5% profit

Result:

• $729,558 profit after 12 mos.
• $74,288 in additional profit (+11%)

For service providers, the pathway to a sustainable business model starts with:

• Migrating SMBs from print (yellow pages, direct mail and newspapers) to online advertising
• Within online, promoting and selling search over standard formats or “banners”
• Focusing on businesses with 10+ employees and in particular 25+
• For businesses with fewer than 10 employee, offering self-serve solutions offered by the major search engines will likely be the extent of their SEM commitment

Assumptions:

• 1,000 account sales/mos.
• Customer spend $500/mos.
• Annualized churn 61%
• Cost allocations:
  • 65% keywords
  • 15% sales comp.
  • 15% product cost
  • 5% profit

Result:

• $858,341 profit after 12 mos.
• $202,671 in additional profit (+31%)

The target market is therefore approximately 1.5 million businesses if defined as the 10-99 employee cohort, and approximately 500,000 businesses if the focus is on businesses with 25-99 employees with average monthly ad spends of $5,000 or more. Reaching those SMBs will be difficult without significant SEM software management and support. In the table below, the average annual spend for SMBs on Paid Search in 2008 was $2,220. Even though this is projected to grow 35% over the next five years, the annual spending by this group of smaller businesses on SEM will barely break $3,000.

In terms of technology, the goal is to empower the advertiser so that minimal direct client support is required and, therefore, service costs reduce relative to volume and revenue. Clients must be able to advertise quickly and easily, and they must be able to monitor, assess and recalibrate their advertising against results. A key component of this is dashboard technology that shows responses against search words so that the cost of a click can be calculated.

For most online B2B businesses, scalability is the key to maximizing profit because the cost of servicing an account is generally unrelated to the level of activity or spend. While there is clearly a cost to generating additional accounts, there is little marginal cost related to the extent of use. Companies that offer database services therefore concentrate on up-sells such as the number of users, redistribution rights, archival access, etc., because the extra revenue is almost all profit.

Much the same principle applies to search advertising and resellers. Getting new customers is expensive. The goal has to be retention, and upsell – in this context, migration to higher levels of spending. It is here that SEM software-management providers can play a critical role, working with search engine businesses and resellers, as well as larger advertisers, to develop solutions that maximize the return on the search investment.

For resellers and affiliates in search of a technology partner to help them scale and achieve these efficiencies, the key questions that need to be asked are:

• What’s the record of performance among current customers?
• What programs and technology are provided to identify and analyze performance problems?
• What programs and technology is provided to optimize performance?

• Does the partner have proficiencies in different types of advertisers, such as SMBs with lower spending levels, or enterprise-level businesses that might spend $1 million per month on SEM?
• What’s the entire fee structure, including set-up and customization fees, and the revenue split between the tech partner and the reseller?
• How scalable is the platform, and what is the current level of customer service – and plans for expansion – as the business grows?
• Is there a “set-and-forget” product allowing a virtual auto-pilot that generates and manages leads for customers with lower levels of ad spending?
• Is the white-label technology for the affiliate also being used by the provider for direct sales, thereby creating in-market competition?

Local advertising markets are in tremendous flux, due chiefly to the release of pent-up dissatisfaction with traditional media. The current economy has propelled advertisers toward more-targeted PPC advertising that promises leads, leads and more leads.

The SEM industry has a remarkable opportunity ahead of it. There is broad demand, but the market has yet to scale. In the end the ones who will survive are those who capitalize on the technology that delivers suitable ROI for advertisers and, as a result, a profitable, long-term business.

About Clickable

Clickable makes online advertising Simple, Instant and Profitable. Dedicated to marketplace transparency, Clickable empowers beginners to professionals to maximize their advertising investment. Clickable Platform is a white-labeled solution for marketing-services companies to rapidly deploy large-scale online advertising programs to their local customers under their own brand. With the most comprehensive and elegant components, Clickable Platform connects every aspect of launching a successful online advertising program for local businesses: lead generation, self-manage advertising dashboards, managed assist services, reporting, support, training, community, billing and full CRM integration.

For more information, visit: www.clickable.com or call 877-775-6699.

About Borrell Associates Inc.

Borrell Associates is a research and consulting firm that tracks local ad spending across all 11 forms of media (online, newspapers, direct mail, cable, radio, etc.) and helps media companies develop executive strategies. We produce industry-related reports, offer revenue benchmarking, give presentations to companies and trade associations, conduct online sales training and Webinars, and provide executive-level consulting services.

Borrell Associates has offices in Virginia and Washington State. Our main office is at 1643 Merrimac Trail, Suite B, Williamsburg, Virginia 23185. The telephone number is 757-221-6641.

For more information visit www.BorrellAssociates.com or send e-mail to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .