The local search-advertising marketplace may be headed for a shakeout where less-sophisticated affiliates and resellers of search advertising could see their business models collapse and their advertisers flee, according to a new report from Borrell Associates. Scooping up the business, it concludes, will be savvy affiliates and resellers who are able to optimize SEM performance through software tools and reporting that show actual ROI to advertisers.
A new report released today by Borrell Associates, Economics of Local Search Advertising, examines the difficulties in selling search advertising to local merchants.
Churn has become a huge issue in the $11-billion-plus search advertising industry. Many resellers see half their customers cancel within 12 months. Profitability is also an issue as dollars get sliced up between the costs of buying keywords, securing reseller software, and paying sales commissions.
This report lays out the economics and suggests standards to help maximize profitability and reduce churn. The intent is to help search-advertising resellers develop a long-term business.
The search engine marketing (SEM) marketplace “has become like a boisterous carnival,” the study says, overcrowded with people trying to elbow in on the excitement, but inevitably a place where many end up feeling hoodwinked and fleeced.
Yet, it adds, “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.
“Search advertising continues to grow exponentially. For resellers and affiliates, 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.”
It’s clear, the study concludes, “that a sophisticated SEM management software solution … 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.”
Borrell says that by using the models it’s 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.”
In terms of technology, the report finds, “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.”
Local advertising markets are in tremendous flux, Borrell concludes, “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.”