ReachLocal & The "Gang of Three"

Written by Bill Tuesday, 25 May 2010 08:55

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The Internet Marketing company, ReachLocal, went public on Friday, with an IPO that raised less than originally hoped. The NY Times article on the event wasn't glowing, pointing out that the share price and capital raised came in far below the expected range. So, is ReachLocal headed for success in the long term?

There is a “gang of three” of sorts, consisting of ReachLocal, Yodle and Dex, that have made a living (if consistent losses can be called a living) by providing Internet Marketing services to local advertisers, in particular those companies that have typically advertised in the Yellow Pages. I have studied the approach used by these 3 and wonder if their business model is long-term viable.

I’ve never seen the concerns I have mentioned elsewhere, so I’ll lay them out here:

First, your advertising accounts are managed primarily by automated systems. Each of the 3 have their own proprietary account management technologies, and that’s the core of their ability to scale their businesses up to the level that might attract investors at an IPO. Here’s the problem: Internet Advertising is a competitive and complex arena. A company that over-relies on automation to manage the ad accounts will necessarily limit themselves to average or below-average performance.

Secondly, that problem with account performance is masked using an unstated policy of non-transparency. As a client of these services you do not have visibility into the advertising campaigns created and managed on your behalf. Your visibility is limited to seeing the sales leads your provider sends to you, leaving you to decide if your cost/lead is reasonable. But these three providers know full well what a reasonable cost/lead is for your industry and they manage your campaigns to that goal. That means if Internet Marketing can bring you a significant reduction in cost/lead, ReachLocal will keep that margin rather than passing it on to you.

Lastly, you don’t have the option of owning your advertising accounts; the intellectual property associated with your ad copy, placements, bids and account history is not yours. If you cancel your contract with the provider you will be starting over again, from scratch. That’s a tough spot to put yourself in. Some companies would not have the financial wherewithal to make the switch away from one of the “gang” to a more transparent provider because of the startup cost and the interim loss of revenue.

A friend of mine owns a locally targeted B2C company and I sat in when he met with the ReachLocal sales rep that was soliciting his business. The rep was a former Yellow Pages ad salesman who had received training on Internet advertising. But, he was primarily a salesman – actually a very good one. Still, his pitch fell flat when tested by knowledgeable practitioners.

I’m not proposing the gang of 3 will die off because there are just too many prospective clients that don’t have the time to understand their choices. But will they adapt their business models to be more tuned to their clients’ real needs? Time will tell.

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