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No. 355
June 8th, 2009

The Problem(s) with Paid Search for SMBs

Devil's Churn

Photo Credit: Devil’s Churn by ArielAmanda

Borrell Associates just authored a report on SMB Search Ad Spend at the behest of Clickable (download report) highlighting the incredible churn rate among SMB’s who are being sold search advertising.    Eminent Local Search analyst Greg Sterling authored an interpretation of the study on Search Engine Land this morning.  

Apparently, the average turnover is around 50% of SMB’s who do not purchase online ads from the same company the following year; for some resellers, the rate approaches “100 percent on an annualized basis” (!).

Even the Wall Street Journal found this newsworthy.  In the final paragraph, they speculate that Google’s rollout of LBC changes was in direct, or indirect, response to the problems that Google and its resellers are seeing with SMB’s quitting Adwords.  I of course would argue (and did argue, last week) that there are MANY more effective steps that Google could be taking to get SMB’s excited about search, but this study indicates Google’s awareness, at the very least from its resellers, of a need to do something.

Greg and I talked about the general state of Local / SMB Search at SMX Advanced last week, including some of the reasons for churn he mentions in his SEL piece:

  • A lack of education for the SMB and appropriate expectation setting
  • Not allowing enough time for the campaign to become optimized
  • Media salespeople who are compensated on customer acquisition, not customer retention
  • Not enough of the advertiser spend going to the media/search buy (as much as 40 percent may go to overhead/profit, yet that may be necessary)
  • In a limited number cases, the advertiser seeking to pick keywords or otherwise dictate or manage its campaign from afar (and not well)

All thoughts are Greg’s; the bolding is my emphasis.  In my experience, #3 is a biggie.  Based on the emails and phone calls I get from my clients, they’re being solicited by about 4-5 companies per week, either by email or phone, for either SEO or SEM services.  By-and-large, these salespeople are a) not very knowledgeable about search themselves b) very aggressive and c) not shy about badmouthing the competition.  

It’s obvious that their commissions are based on acquisition, and also speaks to another reason for churn, which is that unless salespeople stay in constant communication with their customers, they’re likely to be poached by another company.

As far as the profit model, I certainly don’t begrudge companies charging 40% overhead, if they’re able to deliver on that now…but…

I’ve seen paid search for my clients become dramatically more competitive in the last 12-16 months, and the ROI for SMB’s, and thus for their providers, just isn’t going to sustain itself.

With the increasing ubiquity of the 10-pack, Google is forcing more and more large advertisers with deep pockets into paid search, as I argued over a year and a half ago.  This is pricing out moms and pops, who don’t have the scale to compete with Fortune 500’s and big box stores, both in terms of bid management and creative rotation AND in terms of cross-location balance of ROI.

The companies that serve these SMB’s will need to raise bids accordingly.  As a result, they’re going to see increasingly slimmer margins and fewer customers who can sustain the necessary spending levels.

Of course, the risk in all of this is that SMB’s are promised something that ultimately doesn’t lead to revenue, and become soured on the whole idea of search.  Personally, I think this is a GREAT thing for those of us who practice Local SEO as opposed to PPC, though.  These companies like ReachLocal and Yodle, along with Google’s enhanced LBC, are indoctrinating SMB’s into the idea of search, and hopefully piquing their interest in what can be done organically.

This is not to say that PPC can’t or doesn’t work for SMB’s across the board…there are plenty of examples of businesses who have done quite well with it.  But given the massive benefits of a professionally-managed paid campaign and the lack of true quality providers who will serve an SMB (most seem to have a $5k/mo. minimum spend), those businesses would seem to be in the minority.