The newspapers and yellow pages have been used to huge margins, in some cases up to 50% or 60%. There’s frustration in some quarters that margins on online products aren’t higher.
The ad agency world has lived off 15% margins historically, though now they’re less in many cases. Should that be the number that YP publishers pocket when they sell search, etc. to their customers. In other words, 85% to media, 15% to margin. There are some in the Local SEM world that think you couldn’t cover your costs at 15%.
Putting aside “hard bundling” of print and online, if publishers don’t get used to lower margins aren’t these third party search/traffic products doomed in a sense? Why or why not? What do you think?
Screenwerk 
June 19, 2009 at 6:33 pm
I have been running my own adwords campaign for a few years but do not have the time to do it well anymore. I have met with the yellow pages people in my area. I am not sure they can do any better with 85% of the money I am spending. My worry is that they will do about what I have done already collect 15% and not get any better results. I do not think they are doomed though because too many small business owners do not want to take the time to learn how it works and they are selling on ignorance.
June 19, 2009 at 7:23 pm
If one defines local online advertising as just encompassing local SEM, then it seems inevitable that the margins will be driven very low indeed. The barrier to entry is low and it’s impossible to have a distinctive, sustainable competitive advantage. This is not to say that local SEM is easy, that all people do it equally well or that the clever application of technology does not convey some advantage! But, it is just not THAT difficult – so a relatively large number of people can figure it out.
I continue to believe that the game will be won by players offering a broader and more complete service combined with good old fashioned excellence in customer service.
And Ben Fisher is probably right that there is a lot of selling on ignorance. But that never seems like a good long-term business strategy to me — because eventually someone credible will come along and enlighten those people.
June 19, 2009 at 7:29 pm
Ask any agency if they’ll take a $100 client for 15% margins and you’ll get a quick no. The agency world lives off of 15% margins at $10k and up spends. They live on larger margins at lower spend points.
However, if you are the search engine, then the margin is 100%. Consider buying an ad on DexKnows or Superpages. The conversion rates are good, and the click price is kept by the engine. Therefore, margins can be calculated differently if you own part of the distribution channel.
There’s a lot more to the local game then just buying paid ads. It’s the complete suite that’s going to have a better sales proposition.
June 19, 2009 at 8:14 pm
@predictabuy You state: “The barrier to entry is low and it’s impossible to have a distinctive, sustainable competitive advantage. ”
Remember local SEM will not always be equal to setting up a Google AdWords account. With Google market share at 65% it’s easy to spin up a “local SEM” business in your garage and state your on equal competitive footing as true SEM shops.
On the flip side a true local SEM agency (or IYP company playing that role) does quite a bit more. It must manage complex paid search campaigns across three plus search engines, build, optimize and track multiple landing pages and/or websites, create and distribute rich media content, update map and IYP listings…well you get the point.
To do this effectively and in any remotely profitable way you need scalable automation and a proficient labor force. These cost money, thus your barrier to entry.
Furthermore, there’s an old saying, “advertising isn’t bought, it’s sold.” Google’s self-service rates prove this point and the average local agency has zero sales ability. Thus to get the amount of new customers needed to thrive, SEM companies either need to hire and train a sales force or use a middleman (which further erodes slim margins). Thus barrier #2.
June 19, 2009 at 8:36 pm
@Akers – As I said, it’s not ‘easy’ – so I’d agree that leads to barrier #1. I suppose it’s really a question of how high that barrier is and how many people have the will, the skill and resources to get over it.
But I think barrier #2 is often the more challenging one. I fact, I think it’s a big enough barrier that it will be difficult to sustain a business on Local SEM alone.
June 19, 2009 at 8:36 pm
Totally agree with the main point that print margins are not sustainable online. Also totally agree with Brad that a lower margin on a big spend is more the norm. We’ll also negotiate lower for performance bonuses and local is our lifeblood.
When we have skin in the game too, Akers’ point is spot-on. We’re happy to fuss with a relatively small account if we’re involved in profit-sharing with our client.
Print is not dying solely because of self-service ad buys. It’s dying because the managers running those enterprises continued milking the cash cows too long.
Off to tweak a campaign, which is indeed a sustainable competitive advantage in a world where one word on the landing page can mean a 10 to 1 return or a 2 to 1 return.
June 22, 2009 at 2:50 pm
To get back to Greg’s question, are these products doomed?
Greg asks us to forget about “hard bundling of print and online” but we shouldn’t forget there are plenty of online only bundles. If phone book publisher’s take 15% on their SEM product they’ll surely need to subsidize it with a listing on their IYP, a website, video, etc..
Also let me just point out that these publisher’s taking 15% gross margin is a stretch. From fat 50%+ to mid-teens is quite a realignment. However, with Idearc and Dex in bankruptcy they might have the opportunity to realign investor expectations. The days of 50%+ margins are dead. Why not tell your investors that while your stock has no value?
Lastly, can any internet advertising company not have SEM in their portfolio and be considered a viable option? If they can’t figure out how to provide value on the advertising platforms of the future they probably won’t be part of it.
February 25, 2010 at 11:58 am
I have nothing specifically intelligent to add. I’m just piping up to say that I’m with you on this.