Study: Local Search Firms Need Biz Model

While the business of search advertising is booming, a recent report questions whether its popularity is based more on “potential” than “payoff.”

According to a new report from Borrell Associates, client churn rates for companies selling search is close to 60 percent, with most of the attrition by the third or fourth month. As many as 80 percent of clients may be gone in 12 months. Some companies lose as much as 90 percent of their clients.

The Borrell report commissioned by Clickable and released Monday (June 8) outlines ways companies can capitalize on an ad segment that didn’t exist nine years ago but today represents 4 percent of all advertising expenditures.

“The quick emergency of the multibillion-dollar paid-search industry has spawned unrealistic expectations among local businesses eager to turn the Web into a cash register and a cottage industry of companies eager to bolster that dream,” the Borrell report said. “SEM [search engine marketing] has no doubt been oversold and mismanaged by resellers, leaving many local businesses disillusioned with a product that holds so much promise.”

For businesses that can offer a scalable platform to advertisers, the potential is considerable, especially in local advertising. Local search is projected to grow 29.5 percent over the next five years, from $4.1 billion last year to $5.3 billion in 2013.

In contrast, small and medium sized businesses are forecast to decrease ad spending on yellow pages, newspapers, radio and direct mail by 19 percent, representing average annual decline of $3.4 billion. While spending on paid search by local advertisers is forecast to rise 39 percent, representing average annual increased of $242 million. Other interactive media affiliated with local search, such as video and email, are forecast to increase at triple-digit rates by 2013, adding $1.1 billion per year to interactive media spending.

To harness the numbers and control churn, companies offering SEM services will need to develop better business models. “It has yet to scale,” the Borrell report said. “What the industry desperately needs are analytical tools that advertisers can use to assess and recalibrate how they spend their dollars.”