Dave Naffziger's Blog

Backfence’s recent shutdown has been well covered, however wasn’t much of a surprise. Greg Sterling sums up the business model challenges in local:

The business model (and specifically sales) is the fundamental challenge in local. Judy’s Book shifted its model and InsiderPages sold to IAC partly because of the Herculean effort involved in selling into the small business market. Selling ads to local businesses is extremely difficult. And scaling is difficult because all the momentum and credibility must be recreated in each expansion market, unlike nationally focused sites.

So, what is so hard about local?

• Cost of Sales. Might as well get the obvious one out of the way first. Unless you’re able to get self-serve to work, you’re likely selling over the phone. This puts cost of sales in the $200 to $300+ range per sale. Since you’re starting out and don’t have all of the automated benefits of a telesales force at scale, it will look way higher. It took Citysearch $100M to get right side up.
• Inventory. The contractor doesn’t much care for the user reading reviews of restaurants. The further you segment, the easier ads are to sell (the they convert), but the lower the volume you have to offer. We found it hard to generate meaningful impressions for businesses other than restaurants and hard to clear cost of sales for rational advertising.
• Density. Greg nails it above. Critical mass must be achieved in every metro (or sub-metro) area. Furthermore, success in one city does not translate well to success in another.
• Poor existing monetization options. AdSense and YPN performed the best for us, but that was at low single digit eCPMs. Pay per call provides no where near the monetization opportunities.
• Lookup-biased traffic. This is a problem unique to local reviews sites. If you’re doing good SEO, you’re getting tremendous traffic from users searching for the name of businesses (“Wild Ginger”, “Fleur de Lys”, etc.). These are usually looking for phone numbers or addresses and are often existing customers of businesses. The real value for advertisers is in generic searches (“Seattle Restaurants”), when users haven’t made a decision yet.

Solutions to the Monetization Problem

These have all been tried with varying degrees of success:

• Sell Other Inventory. Citysearch is first and foremost a calling card for its telesales reps. They sell advertising on Citysearch, but they also sell clicks on Google and Yahoo. In fact, I’d argue that a large percentage of their revenue comes from off-site PPC sales.
• Partner with Local Sales Forces. The inverse of Sell Other Inventory. Cox-owned Kudzu has arguably sold the most local on-site ads/profiles, but has done it through the existing Cox sales force. A $20-$50 monthly fee becomes an ‘easy’ add-on to businesses buying $500+ monthly advertising packages. And what sales rep wouldn’t want a way to increase their ASP. The problem for startups is these companies are all big slow moving companies that frequently have competitive offerings. They’re hard deals to count on.
• Sell Display Ads (or sponsorships). To national advertisers. Totally different type of sales force. It works for newspapers and radio stations.
• Saturate. See Local.com’s results pages. 100% of the above the fold real estate is taken up by ads They claim an admirable eCPM of $35.
• Self Serve. The holy grail for local websites. To date, only Google, Yahoo and maybe some of the IYPs have successfully self-served local businesses. At JB, we thought consumer reviews would open the door for self-serve advertising. We never fully tested self-serve, but learned that the activation hurdle for local businesses is high.

Yes, there is a giant pot of gold in local. No, it isn’t easy to reach.

Some of these challenges and solutions alter when you shift towards shopping oriented activities as JB is currently doing. I’ll save some of that for a later post.