ReachLocal Grabs Huge Round for Local Sales

The image “http://www.reachlocal.com/register/images/06/rl_header_logo.gif” cannot be displayed, because it contains errors.ReachLocal reportedly just got a mind-boggling $55 million from Rho Ventures, Galleon Crossover Fund and VantagePoint Venture Partners (haven’t seen a release however), bringing its total investment to nearly $70 million. This is dramatic but it makes the end game for the company a bit foggier in my view.

ReachLocal was one of the first and certainly is one of the most prominent SEM firms for SMBs. However, unlike other, smaller firms in the segment that have been bought, it has not. Now it has a staggering valuation ($300+ million according to TechCrunch) that almost certainly precludes any kind of near-term acquisition. That said, Reach is successful and has meaningful and growing revenues (I’ve heard various estimates, but many millions of dollars).

The company has clearly decided to go, pardon the expression, “balls out” and build a sales force on a national basis. It has been opening local offices over the past year but this funding will dramatically accelerate the process. I suspect we’ll also see some advertising – maybe even TV/video ads – as a result of the funding. There’s an opportunity to create a ‘brand” here because, despite there being at least a dozen companies in the same segment SMBs are largely ignorant of who these companies are. Most are also working with sales channel partners on a “white label” basis as well.

But since Reach is reaching out directly to SMBs, there is a opportunity to do some national advertising in both print and online media and build awareness among SMBs that Reach is an “onramp” for them to online advertising.

Building a local sales force was part of ReachLocal’s original plan when it launched. But my sense is that the plan was initially shelved as being too challenging. Training was an issue; the quality of people was an issue. But after failing to land any tier-1 yellow pages partnerships (there were CMR partnerships) the company set sail on a course to become independent. This latest round is the result of that independent course.

Essentially the company is building a yellow-pages style sales force without the directory publication (Weblistic and Yodle are attempting something similar). It’s an audacious but possible enterprise. At this point in time, a sales force (premise and/or telephone) is necessary to truly tap the SMB potential for local Internet advertising. However, the argument goes, the yellow pages sales force has various “conflicts of interest” – chiefly financial allegiance to the printed product. There’s also the contention that as print usage continues to decline over time, that product will be harder to sell (even as part of a bundle) to SMBs who will just want electronic distribution.

These arguments, which have been made to me, may or may not actually come to pass. But there’s clearly an SMB appetite for Internet distribution and a need for someone to educate and help SMBs get from where they are to the various consumer points of entry on the Internet. The yellow pages (and others) are doing this, but only for a minority segment of the potential market.

Google, Yahoo! and, to a lesser degree, Microsoft are the indirect beneficiaries of these programs because that’s where the traffic mostly comes from. So while Google is dipping its toe in the water of local sales with its local business referral program, Reach and others are building professional sales forces that will send SMB revenue to Google, et al. This model is the fruit of “infrastructure” that began in 2004 with companies such as Marchex and BellSouth (now part of AT&T) and SME Global Solutions (now WebVisible) and has grown over time. All the major yellow pages, webhosting firms, some verticals and a growing number of newspapers offer a suite of Internet marketing services powered by these firms (WebVisible, Marchex, et al).

Yahoo! has an opportunity with its newspaper consortium to leverage the local market presence and sales force of its newspaper partners. We’ll see if it can effectively do that.

Occasionally I still get the question from journalists and others about whether Google or Yahoo! will “buy a yellow pages company.” The answer is always no because it would be inefficient to take on all the overhead and there’s no cultural fit. But Google, Yahoo and Microsoft have to buy a yellow pages company because they own the distribution that everyone is feeding into.

One question will be, as Reach and its competitors grow and proliferate, whether the traditional yellow pages can hang on to their advertisers in the face of growing and potentially lower-priced competition. But the yellow pages are also familiar to SMBs and trusted to varying degrees. As one person said to me, “there’s a lot of noise in the channel.” SMBs have increasing numbers of companies offering marketing services to them, which makes for more choice but also more confusion. That confusion often translates into “inertia,” which benefits the yellow pages.

This is why I say that there’s an opportunity to establish a “brand” here. If there’s a trusted alternative source for Internet marketing, many SMBs will willingly sign up. But that’s still “a ways off,” as they say.

The drama that the media and some in the industry like to follow is: yellow pages vs. new media (e.g., Google). But recognize that the yellow pages publishers “own” only about a 1/3 or so (3-3.2 million) of the “addressable” market. This is ultimately a very big opportunity. If there are roughly 20 million SMBs “on paper,” about half of that number is willing to spend any money on advertising, ranging from $600 per year to several hundred thousand.

Google has fewer than 1 million advertisers, off of whom it will likely make more than $12 billion this year. The yellow pages industry in the US is worth just over $14 billion.

There are roughly seven million SMBs out there in the “addressable market” that are not yellow pages advertisers and could be served by Internet marketing to varying degrees. And in the entire market if there are a million US SMBs that are willing to spend $1,000 per month (or $12K per year) that’s $12 billion in potential revenues that have yet to be tapped.

___

Attention VCs and private equity firms: there’s a “roll up” opportunity to take a bunch of these companies (there are more now) and build something larger, such as Reach is trying to build organically.

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22 Responses to “ReachLocal Grabs Huge Round for Local Sales”

  1. Training » ReachLocal Grabs Huge Round for Local Sales Says:

    [...] Check it out! While looking through the blogosphere we stumbled on an interesting post today.Here’s a quick excerpt was initially shelved as being too challenging. Training was an issue; the quality of people was an [...]

  2. Jonathan Mendez Says:

    Isn’t PPC really simple enough that many SMB’s can do it themselves? I like what Google is doing with Intuit/QuickBooks. Google has understood the value of partnering in the SMB space.

  3. Greg Sterling Says:

    PPC is not that simple. You can initiate a campaign but it takes time and effort to optimize that campaign. Most SMBs would rather just run their businesses. the Intuit deal is good “on paper,” but so far the implementation is not very impressive — just a hand off to Google AdWords basically.

  4. Jonathan Mendez Says:

    Possibly but most SMBs will also not want to pay extra fees for something they have the ability to do themselves.

    I think the SMB market is quickly headed toward scale through mapping/mobile and GYM will find a way to online local businesses directly.

    All most SMBs really want (and the users as well) is a phone call anyway, not a click.

  5. Greg Sterling Says:

    While they may want calls, they fail to answer the phone a majority of times. Only about 20-25% of calls in a PPCall scenario make it to an actual live SMBperson.

    That problem is partly what FastCall411 is trying to address by sending out multiple calls to SMB merchants simultaneously.

  6. Rob Says:

    Good post Greg. That is an impressive level of investment. Selling local is tough and very tough to scale nationally. I agree fully that there is definately a “roll up” opportunity in the space…..similar in terms as what the independent yellow page publishers went thru in the 90′s….establish a sales force in certain markets, show traction and then sell out to Yellow Book. It will be interesting to see who if anyone turns out to be the “yellow book” in this space.

  7. Greg Sterling Says:

    Thanks Rob. Good seeing you last week if only briefly.

  8. » ReachLocal Scores $55M Funding Says:

    [...] something similar). Its an audacious but possible enterprise,” writes Greg Sterling of Sterling Market Intelligence. “Theres clearly an SMB appetite for Internet distribution and a need for someone to educate [...]

  9. Jeff Says:

    Adding to Rob’s comment: One difference, relative to Yellow Book-type roll up, are lower barriers to consolidation. The various incompatible print publishing systems, billing systems, reporting, etc created a bit of a barrier to consolidation. Think groups of SEM clients and the supporting processes are easier to integrate…perhaps you’ll see smaller SEM teams merging into bigger competing interests.

  10. Outside.in Grabs Some Cash Too « Screenwerk Says:

    [...] Grabs Some Cash Too Lost (to me) in the frenzy of coverage and resulting questions about ReachLocal’s big round was a much smaller investment ($1.5 million) in Outside.in. The company is trying to scale [...]

  11. Sabrina Says:

    Hi Jonathan:

    I think you should look into what the Reach technology really does for it’s clients. My husband uses it for his company. It’s not about clicks it’s about ROI (quality clicks that will make the phone ring). The Reach technology matches up click to phone call. In other words, what keyword on what search engine in what position generated the lead source…in Reach’s case a lead source is considered a phone call, email or form submission. Since it’s smart technology…the more it learns the better it gets and the more efficient that same monthly budget becomes over time. The system start eliminating the waste factor of keywords that just don’t seem to produce over time. The industry buzz word for this is conversion based optimization. My husband can log into his report and hear the calls that are coming into his company 100% through reach advertising. That my friends is transparency! Now a business owner can run their business quantify results and even use it as a training tool for their support staff who are catering to the calls…So for Greg’s point about not answering the calls that can be addressed because that would be seen on their report.

  12. Paul Says:

    Sabrina,

    Either you work directly for RL or your husband has one heck of a salesman.

    RL’s technology is no better than anyone else’s in the space. You can call it conversion-based optimization, ROI-based optimization, call-based optimization. Whatever you choose to call it, most SEM agencies or resellers either offer the same thing or are working on their own “technology.” In addition, call tracking and call recording are all managed by the same third party vendors. Any company can get a VoiceStar, EStara or Who’s Calling to provide call tracking and recording.

    One common rumor about RL is that they struggle to find a sales force clever enough to sell to SME’s and geeky enough to simultaneously manage accounts. The traits required to do both rarely manifest themselves in one person.

    This problem isn’t unique to RL, every “old media” company trying to sell “new media” products struggle with some variation of this problem. Can I teach an old sales dog new tricks?

    In the end, RL is in a nice position to give it a try. $55 million can solve a lot of problems.

  13. Reach Local Raises Big Funding « A Fuller View: Dylan Fuller’s Blog Says:

    [...] a significant amount of additional funding… A big and tasty $55 Million! Both TechCrunch and Greg Sterling have more analysis. My initial thoughts are that is seriously validates SEM for the local space and [...]

  14. Brian Says:

    While the technology is important, the key to success with SMBs and SEM is the combination of tech savvy, time, budget, and lack of fear.

    Most SMBs that have the budget would rather pay some to overcome the time, fear, and ‘tech savvy’ success factors. This is why very lucrative parts of the SMB market use ‘trusted resources’ to on-board and manage SEM campaigns.

    Those ‘trusted resources’ need to be real account managers – whether ‘feet on the street’ or ‘dedicated inbound case managers’.

    The SMB market is clearly defining a need beyond self-provisioning…

  15. Weekly Local Wrap Up - 10/12/07 | LocalPoint - Perspectives on the Local Internet Says:

    [...] ReachLocal Grabs Huge Round for Local Sales [...]

  16. Len Muscarella Says:

    Thanks for the post, Greg.
    We have several clients who had been using ReachLocal and did not seem to be getting any of the intelligence you would expect in SEM marketing. They were paying $3,500 or more a month and didn’t know (1) what search terms they were purchasing; (2) what the ROI was for various search terms; (3) how their ads read; (4) what they were paying per word per click. And when we finally got ReachLocal to provide them that information, we saw a lot of bad purchasing going on — buying words that would deliver impressions but not the right ones.
    As a result, we have been telling clients to avoid ReachLocal. They’re good a billing, but I’m not sure they’re good for their clients or the reputation of SEM.

  17. Yodle Building Feet on the Street Too « Screenwerk Says:

    [...] of the things that makes Yodle interesting and different is that, like ReachLocal, it’s opening local sales offices. It currently has five in New York, Philadelphia, Boston, [...]

  18. Gilman Says:

    Sterling – Please clarify your comments:

    “we saw a lot of bad purchasing going on — buying words that would deliver impressions but not the right ones. As a result, we have been telling clients to avoid ReachLocal. They’re good at billing, but I’m not sure they’re good for their clients or the reputation of SEM.”

    How do you “buy impressions”? Isn’t that CPM? You don’t but impressions on a CPC model. I have seen their platform and it does deliver what you are saying it does not (from some of my customers) and working in a competing organization on the local side, they do scare me. That is a load of bunk and I am a competitor of RL – They are the real deal and I am losing clients hand-over-first to them.

    Your comments are crap

  19. Greg Sterling Says:

    This was a comment from Len Muscarella that he sent to me to post on his behalf. Not my view; entirely his opinion. See above.

  20. Chuck Says:

    What happens if verizon starts to scale up superpages.com in markets where reach is trying to play? I imagine they are driving a ton of value from the cheap cost per calls on IYP to help offset the expensive cost per calls on S/E. Will be curious to see how that plays out

  21. WebVisible Raises $12 Million in a Series B Round « Screenwerk Says:

    [...] firms. It and Reach Local are the two largest of these firms and both are still independent. Reach recently raised $55 million against a rumored valuation of $300 [...]

  22. pmaingot@reachlocal.com Says:

    call me tony from dixie auto glaas @ 905 795 0000

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