Study questions local search industry scruples

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On June 8, Borrell Associates released a report, underwritten by SEM software provider Clickable, which questions the current state of local search advertising service providers or “resellers.” The study notes resellers are not doing enough to reduce high churn levels that can be as high as 90% within a year. It also says these resellers are tacking on high margins for services to local advertisers and not offering local advertisers sufficient ROI.

“For quite a few resellers who are going after the smaller advertisers, they are really hyping the product and doing a disservice to the industry by almost ruining its reputation,” said Gordon Borrell, CEO of Borrell Associates. “I think a lot of them need to get out of the business.”

According to the report's introduction, the paid search 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.”

However, the local advertising marketplace is still a bright horizon for the search marketplace, he continued. “We think search is a very viable advertising segment that produces great results and great leads for advertisers. But it has to be managed properly.” That involves not being greedy, devoting more advertising spend to buying keywords and not going after advertisers that will spend less than $500 per month.

“The smaller local advertiser is not that sophisticated, and there are a lot of local businesses eager to change spending,” he added. "They can be easily taken advantage of during these times."

Not surprisingly, providers in the local search advertising space don't agree with all of Borrell's findings.

“I think the churn numbers are most significant,” said Kevin Ryan, CMO of WebVisible. “The thing people seem to be missing in the [churn] process is how many business go out of business in their first year and how many businesses move to a different resource for their search advertising.” Those issues are not often taken into account when looking at the local search space, he noted.

“[Local businesses] have a lot of choices,” he said. “So every time I see one of these reports I laugh out loud.”

At the end of the day, he pointed out, small businesses need a lot of help — and not just with keyword search. “They've proven consistently that they don't have the time nor the inclination nor the comprehension to fully assess a competitive set,” he said. “Your average contractor does not want to be spending his time matching keywords to landing pages.”

For Clickable, which sponsored the Borrell report, the study rightly points out the challenges faced by the local search industry but also the opportunities.

“There are friction points, but the question is how we solve them and make the tide rise for everyone,” said Max Kalehoff, Clickable's VP of marketing. “Some of the margins of the middlemen are maybe out of whack in some cases. We believe there are several things that will help decide the winners [in this space] going into the future.”

One, he explained, is that there should be a “recalibration” of the customer investment. “When a service provider takes $1 from a local business, more of that needs to go towards media spent than profits or margins,” he said. Then, there needs to be better ROI. “The spend needs to be optimized better – we use technology to drive much greater precision and efficiency.”

The report is timely, explained Borrell, because with local search advertising growing at such a fast clip – Borrell's research projects a 30% growth in the space over the next five years – there is also the potential to severely damage the industry. “With these small local advertisers, if they buy something and get burned, it's really hard to get them back,” he said.

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