Evolve Or Die: 2010 Local Ad Agency Fiscal Models

House Fire-The Movie

Borrell Research released a report on the Economics of Search Marketing for firms catering to local—ReachLocal, Yodle, MarchEx, WebVisible, and others.  Companies in this space churn up to 90% of their clients every 6 months, meaning that they lose clients as fast as they can gain them.  The Kelsey Group confirmed this trend last year, citing the inability of these companies to deliver leads.

Clients will stay on a few months in good faith, giving the lead gen’ company time to make the phone ring.  At a certain point, pleas to allow the system more time to “optimize” and concessions not to leave break down, leading to more churn.

The first segment of this two part blog will tackle burning questions local ad firms must understand and address, namely why their industry is in jeopardy of going down the tubes, how they can fix their current situation, and where their market will be headed in the future.

Why are local search marketing companies failing?

  • Low media spend: These firms allocate 30 to 50 cents of the client’s dollar on buying clicks, given the 15-20% sales commissions they must pay, plus a fat profit margin.  MarchEx reports a 55% gross margin. Thus, how much is left to actually spend on Google AdWords, Yahoo Search Marketing, and other sources? For obvious reasons, these firms will not tell you how much of your dollar is actually going towards spend versus commissions and profits.
  • An uneducated client base: “Get found on Google” is a great sales pitch and most small businesses know they have to do something about their web presence.  However, how likely is the local dentist, cosmetic surgeon, roofer, or personal injury attorney going to ask, “So what percent of spend are you allocating to my campaigns?  And how exactly do you manage my paid and organic campaigns?”  Managing a web presence themselves is daunting and agencies play into that fear.
  • The need to grow: Fueled by venture capital, these firms are forced to shoot for billion dollar exits.  Venture capital looks for a 10-to-1 return on their money and an exit within several years. This often leads to imprudent growth, aggressive sales tactics, and “overheating” of the company’s engines. Yodle.com reports having 5,000 customers at the end of 2008, but was on track to hit 50,000 customers by the end of 2009.  ReachLocal in their December 2009 S1 filing discloses 15,000 customers.
  • Lack of technology: The game is about sales—hire more salespeople and sell more accounts, as opposed to cautious growth, hiring experienced search professionals who have hands-on search experience, and optimizing the process of delivering efficient and effective campaigns.  To engineer a platform to build high quality paid search campaigns, create websites that organically rank on important keywords, and properly train staff is a major undertaking.  Canned search campaigns driving traffic to canned landing pages is not.  We also need scalable process and technology.
  • A “winner take all” mindset: Firms choose to “floor it” instead of taking time to work on the engine in the shop before going up to the starting line.  They are counting on sidestepping the performance issue by mention of “proprietary” technology— enough to satisfy unwitting investors and customers.  Behind the façade, many agencies have low wage staff offshore manually configuring search campaigns.

Clients are stuck between a rock and a hard place—low fee packages that are self-serve versus packages that do provide service but are out of their budget. And it’s not just the direct sellers that are churning customers, the $10 a month fee guys are, too, as indicated in this Kelsey report.

What will it take to fix the current environment?

  • A shift to transparency. Local search marketing firms should voluntarily adopt a code of ethics, which includes:
    • Transparency: Clients should have the right to inspect their PPC accounts to know what keywords are being purchased and at what price.  Consider how the FDA requires food companies to disclosure how many calories and how much sugar their products have.
    • Campaign portability: Wireless mobile providers have been forced to allow customers to take their phone numbers to other carriers.  The same should be true with search agencies.  Should the client choose to leave their current provider, they should be able to take their campaigns with them.  Current practice is to hold the client hostage—if the client leaves, they lose their campaigns as well as landing pages.
    • Open disclosure of advertising methods employed: While the agency may be driving leads, the client’s own site has not developed organic search power.  Traffic has been sent to a subdomain owned by the agency—not the client’s site.  Should clients leave, they are left with nothing; this dependency makes the decision to switch agencies extra difficult for the wrong reasons.
    • No long-term contracts: 12 month contracts are common, as agencies seek to lock in the client in anticipation of them wanting to leave preemptively.  Yellow page publishers have one year contracts because they print the book once per year; as this theme does not carry over to search, agencies should allow clients to leave if they are losing money with their current provider.
    • Sales compensation models: A common complaint among clients is that once they sign a contract, they never hear from the rep again. That rep is already on to the next prospect, ready to sell, sell, sell—hit the aggressive quota or be terminated.  To our knowledge, no other company in the industry pays their people according to retention and client satisfaction.  Agencies should agree to compensate staff based on client performance, else we face a repeat of the long distance telecom switching battles witnessed in the 1980’s. The social gaming model will potentially transform the Farmville players into an army of local resellers.
    • Guaranteed service levels: When a client logs a ticket, they should expect a timely response.  For example, general inquiries should be answered within 72 hours.  If their site is down, they should expect a response within 3 hours. Clients don’t know who to talk to when they aren’t getting leads—the agency’s outsourced call center agents in India are unaware of how to service the issue, while the overeager sales rep is nowhere to be found.
    • Industry certifications: In the wild west of local advertising, anyone can claim expertise.  We recently met an agency claiming to be the only certified agency to do search in all of Asia— no such certifications exist.  The closest to having standards in the industry are SEMPO (Search Engine Marketing Professionals Organization) and Search Engine College. But these standards are not yet formed nor are they adopted by a wide enough audience to be deemed legitimate.

Where is the market eventually headed?

Pay for Performance
As the client base becomes more educated, the current sales tactics will no longer fly. Over the last five years, the market has evolved from CPM (cost per thousand impressions) to CPC (cost per click) to CPA (cost per acquisition).  New agencies will emerge that will charge based not on long-term contracts of fixed dollar amounts, but Cost Per Call, such as Yext.  As a dentist, imagine being able to pay only for calls, as opposed to a fixed monthly advertising figure. This reduces the client’s risk—yet this model requires that the agency actually be able to perform instead of sell.  This increases transparency, but not to the levels needed.

Performance Reporting
As a corollary to the Cost Per Call model, clients will be able to log in to view exactly what the agency is doing with the campaigns—how their company is being marketed, what types of traffic is being purchased, what is being spent, and how many leads are coming.  Current agencies seemingly show some of this reporting, but build their fees into the reported figures, so that clients are unaware of what is actually being spent on what keywords.

Robust Service Offerings
Pay Per Click campaigns driving traffic to canned landing pages is the “quick fix” to show immediate results.  However, the longer-term, more effective approach is to help the client rank organically in search results, as opposed to having to pay for every single inbound click.  Ranking organically requires:

  • a comprehensive process to list the client in Google Local Business center and other directories
  • helping the client place content on their website that reflects their unique selling proposition
  • setting up email auto-responder campaigns (so that leads to the client’s site can be nurtured into paying customers)
  • systematic training of the client (so that they can easily manage the site from a non-technical standpoint

This robust service offering goes far beyond what current vendors are offering, yet will soon be offered in the marketplace at significantly lower cost than the PPC only players who have been first on the scene.

Part two will be published tomorrow, so stay tuned for more on how the financial model of local will adapt over time.

photo credit: dvs

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