Local Advertising on the Net

By Gerry Blackwell | Posted December 24, 2003

If you're a small business exclusively serving a local market, you probably think the Internet has little to offer as an advertising medium. And you may be right — for now.

But the Net is changing. Even if you can't take advantage of current online advertising opportunities, you should be aware of what's out there. And you definitely need to be aware of the new opportunities coming down the pike.

According to The Kelsey Group, a Princeton, N.J. market research firm, small and medium enterprises (SMEs) like yours spend about $22 billion a year on local advertising, much of it on Yellow Pages ads.

"There are a lot of dollars at stake," notes Kelsey Group analyst Greg Sterling.

That makes local SME advertisers very attractive to the Internet advertising industry, especially search engine companies with their paid search services and Internet Yellow Pages (IYP) firms.

These companies are working overtime to figure out how to lure local advertisers. There are obstacles to overcome. One is how to localize interactive Internet advertising? But the ad companies will eventually succeed, Sterling believes.

The Kelsey Group predicts that all forms of online advertising competing with print directories — mainly paid search and IYP — will see a compound annual growth rate (CAGR) of 6.9 percent between now and 2008.

By that year, the digital alternatives will have grabbed 24 percent of the market.

Local Relevence
Internet Yellow Pages have been around for several years. They mirror their offline analogs and are often operated by telco Yellow Pages subsidiaries. IYPs recruit advertisers locally and present ads in more or less static databases organized geographically.

The good thing about them from an advertiser's point of view is that when users search an IYP and are presented with your ad, its relevance to them is very high.

IYPs continue to grow slowly, though. Even though some print Yellow Pages offer free online listings, the current number of IYP ads is a small fraction of the three to four million annual print Yellow Pages ads, Sterling says.

Part of this is that users still aren't using IYPs enough, so advertisers won't buy — a classic chicken-egg problem.

The Kelsey Group says that while the average weekly use per person for print Yellow Pages is down from 2 in the 1990s to 1.4 now — a hint of the kind of decline that might be in store for them — the average weekly use of IYPs is still only at .33.

A few factors will turn this around, though, Sterling says. More and more families are getting broadband access. When they do, they're more likely to use Web resources. And the next generation of customers already takes for granted that searching the Web is the best way to find anything.

The Search Is On
Advertisers are also getting younger — and more attuned to the Internet as an advertising medium. The Kelsey Group says that the newer a company — a rough indication of the age of its managers — the more likely it is to advertise online.

IYPs are an interesting opportunity, or will be, but the more interesting opportunity, both from an advertiser and ad seller perspective, is paid search.

Except that localization now becomes a huge problem. The industry is working hard to solve it because it wants to take a serious run at the local SME market.

It's partly motivated by forecasts suggesting that current market growth for paid search advertising — which now relies mostly on big, non-local advertisers — will begin to flatten by 2008, Sterling says. The industry needs a new market. SMEs are it.

Search engine companies like Yahoo and Google court advertisers with two types of paid search. With both types, customers pay to have word ads with links to their Web sites displayed whenever a user enters a particular keyword or keywords in a search.

In one type of paid search, the ad appears right in the search results and is indistinguishable from the algorithmic or organic hits — those actually found by the search engine. In the other type, the ad appears in a separate part of the screen alongside the search results.

Paid search is extremely attractive for a couple of reasons. First, advertisers pay per "click-through" — in other words, only when a user chooses to follow the link from their ad.

"The value proposition is simple," Sterling says. "You know exactly what you're getting. In effect, you're only paying for leads."

This is in marked contrast to the dominant form of small business local advertising, print Yellow Pages, where you pay upfront for the year, hope the ad delivers customers, but never really know for sure.

Paid search advertisers in some cases can even determine within a range what they will pay per click-through — they "bid" for keywords. How much they bid determines how prominently their ad is positioned on the page.

Some ad sellers even allow customers to establish a ceiling on what they will pay in a certain period — if you're paying ten cents per click-through and set a limit of $200 a month, after you've had 2,000 hits, your ad stops appearing. Built-in, automatic budgeting.

Local Initiatives
Paid search works fine for advertisers who sell standard products they can ship anywhere. For businesses that only operate locally, though — especially services — it doesn't make a lot of sense to advertise this way because many or most of the users who see your ad aren't in your area so likely won't follow the link.

The Internet ad industry is working on some interesting solutions to this problem. Google, the dominant player, has two initiatives underway.

In one, it's using "IP address targeting." In searches in which a location bias is inferred, Google will determine user location based on IP address and only present results relevant to that location. If you're searching for "Indian restaurants," for example, it's a good bet you only want restaurants in your area.

"It's an imperfect solution, though," Sterling cautions.

Google employs technology and services from Digital Envoy that can plot most IP addresses geographically. Trouble is, some big, national ISPs — such as AOL — assign IP addresses to subscribers from a central pool. In those cases, IP address gives no clue as to the actual geographic location.

Google also hasn't perfected mechanisms for determining which search results — which pages — are actually relevant to a particular location. It doesn't have this problem with advertisers, of course — it knows where they are. But such a service has to be able to deliver organic hits as well.

This is also an inhibitor in the company's other initiative, Search by Location, which Google is piloting at its Google Labs site. Users are presented with two search boxes, one for keywords, one to enter location. It delivers results plotted on an onscreen map.

So far, Search by Location only returns organic hits, not ads.

"Google says it doesn't have any plans to deliver ads, but it's easy to imagine how you could monetize this approach," Sterling says. "It could be all ads, or it could be a mix of ads and organic results."

Overture, which provides Internet searches that only return ads, has a similar search by location initiative. It doesn't face the same kinds of problems of determining the location of the hits. The hits are all its customers and it knows where they are.

AOL users can click on an "In Your Area" tab and use a search engine to get exclusively localized results through content providers already dealing with local content such as AOL City Guide and Moviefone, and eventually MapQuest and various IYPs.

"All the search engine companies have some sort of localization initiative that they're working on," Sterling says. "And for all of them, from a consumer perspective, the relevance of the results is getting better, but it's still not as good as Internet Yellow Pages."

Logistical Problems
Plus, there are logistical problems both for small businesses who want to adopt this type of advertising and for ad sellers who want to reach local SMEs.

The ad sellers try to make it simple by letting advertisers "bid" for keywords and submit ads online. "It only takes 10 to 15 minutes to post an ad," Sterling notes. "But it's a much more complicated thing to perfect the skills to do it well."

And many of the ad sellers, including Google, insist that ads must get results — otherwise with the per-click-through pricing model, they don't earn revenue.

If an ad isn't getting clicks, Google puts the customer on notice to improve the ad to make it more attractive. If it still doesn't get results, Google will eventually kick it off the system.

"What winds up happening is that there's initially a lot of excitement on the part of the small business owner," Sterling says. "But then once they get an e-mail saying their ad is not performing, they start to find that it's a time-consuming and labour-intensive process ensuring the ads perform."

Interim Solutions
The ad sellers for their part have a problem in that they mostly don't have "feet on the street" selling ads locally the way print Yellow Pages do.

Bell South recently launched a small business service that might help break the log-jam. It's selling to its print Yellow Pages customer base, offering to intermediate with the Internet ad sellers.

Customers pay for a block of click-throughs per month and Bell South guarantees it will deliver the click-throughs by posting ads on the customer's behalf with various Internet search engines and other ad sellers.

"It simplifies the whole process for the advertiser," Sterling says. "This is really the only way it's going to happen on any kind of scale for local advertisers and search engines — they're going to need somebody like this to step in between them."

Of course, the search engines still have to solve the localization problems. Stay tuned — the answer could be on the horizon soon.

Do you have a comment or question about this article or other small business topics in general? Speak out in the SmallBusinessComputing.com Forums. Join the discussion today!

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