The ABC’s of Local Advertising: From Glengarry Glen Ross to Foursquare

Piper Jaffray’s Gene Munster recently released Always Be Closing: The ABC’s of Local Online Lead Generation. On top of the classic Glengarry Glen Ross reference, the report offers a wealth of revealing statistics on the evolution of local advertising online.  Quality leads are still gold, but the methods by which they’re mined are changing.

Piper Jaffray projects online local ad spend to grow from $11.8 billion in 2008 to $19.2 billion in 2013. While local dollars represent 50% of overall spend today, the segment is expected to outpace growth in national dollars, climbing to 57% by 2013.

Today 60% of internet users turn to search engines or online Yellow Pages to find local businesses, and that metric is expected to jump to 90% within 5 years.  Google, which is currently serving less than 5% of US small businesses, should capture a significant portion of increased local spend.  Facebook, with its massive usage and compelling targeting capabilities, should also benefit handsomely from this growth.

The traditional Yellow Pages business is reportedly still twice the size of Google’s overall search revenue.  While it’s not going away anytime soon, the traditional approach is stagnating online, as leader SuperPages.com has seen traffic drop 3% over the last year. Within the same period, Yelp, with its user generated reviews, has seen traffic increase 85%.

While new models for local are required to succeed online, something unlikely to change is that phone calls, not clicks or impressions, is the primary metric that local businesses care about.  Phone calls lead to sales. 

This dynamic along with geo-targeting should make mobile a huge driver for local advertising.  According to comScore, 36% of mobile phone users conducted a local business search in 2008. While local businesses have yet to discover mobile as many of them are just starting to advertise online, Piper Jaffray believes there will be a $1B mobile search ad market in the US by 2011-12.  Research estimates tend to be overly optimistic, particularly in regards to speed of adoption, but the market is clearly shifting.

From an investment perspective, many digital media players have preferred to focus on national ad-based models given its relative ease of scale vs. local.  Deploying a local sales force, which is most efficiently done via outbound call centers, can be incredibly expensive.  Nonetheless, a number of companies have succeeded after spending years building up a local presence.  Examples include local review sites Angie’s List, IAC (CitySearch/InsiderPages), and Yelp, and local lead gen sites NetQuote, ReachLocal, Yodle, and emerging player Yext.  Others like Facebook and Google are succeeding on a self-serve basis with highly targeted ad inventory across a massive user base.  Twitter should have a play here as well long term.

Given that innovation follows money, we will continue to see startups emerge in the local ad space, such as Foursquare and Gowalla, which are competing to be the king of social location.  These services have discovered a novel approach to scaling locally via gaming elements, which have yielded fanatical user bases that build content, promote the services virally, and may ultimately be a sales channel.

The mayors and frequent visitors of local businesses, who are likely well known customers, are the direct beneficiaries of discounts and promotions.  If they can engage a local business to participate, they’re likely to increase their activity with that business.  This symbiotic relationship could make users a valuable sales tool. 

I convinced my favorite local eatery, where I’m mayor, to join foursquare.  It’s not worthwhile for a suburban pizza place to offer their one foursquare-using customer a discount, but it could certainly be worthwhile for popular urban hangouts with multiple users competing for location status to do so.  Perhaps Foursquare’s for closers!