Tuesday, January 29, 2008

Debunking 5 Myths of Local Internet Success

Despite the myriad of investments, different business models and site types, very few companies have built viable businesses. A recent study of 80 “local” Internet companies, commissioned by MerchantCircle and conducted by SmokeJumper Strategy, a consulting firm based in Silicon Valley, identified five (5) myths of local Internet success.

#1. Build It and They Will Come
Many companies start with the idea of a founder or founders to build a better mousetrap. While the germ of an idea is a necessary start, it of itself is not enough to build a company. There are plenty of examples of companies building great features but generating relatively few unique visitors or page views: CityWaboo generates less than 5k page views monthly; OnlyBusiness.com attracts under 1k unique visitors per month; and SuggestLocal has so little user activity that it doesn't register results on Compete. Even those who achieve relatively good traffic numbers aren’t destined for success: Edgeio was generating over 1.5M page views monthly when it decided to shut down; Insider Pages has over 1.8M unique visitors; and Judy’s Book still generates approximately 1.4M page views monthly (even after laying off the whole company).

#2. SEM = The Holy Grail of Traffic Generation
Many companies in local have experimented with Search Engine Marketing (SEM) as a way to drive traffic to their sites. When comparing overall page views against these companies’ search engine marketing budgets, it is clear that very few companies rely primarily on SEM for traffic generation. However, there are a handful of companies that are spending between $100k and $300k monthly on search advertising. For those companies that buy the vast majority of their website traffic (Done Right!, Outside.in and Ziffleads), the question is obvious – how sustainable are their business models? Are they able to monetize traffic at a rate that is higher than the costs incurred?

#3. Go Forth and Conquer the World
Blame it on the ambition of the big thinkers and dreamers of Silicon Valley and beyond, but many companies attempt to build a local brand nationally or even globally simultaneously. When you step back from this notion, one can see the flaw in the logic (or is it irony?) or at least the difficultly for a small start-up to accomplish this. (This myth is correlated to myth #1 “Build It and They Will Come”).

Companies such as SmallTown have fought the temptation to roll out nationally, rather starting with a focused geographic market. The result has been utility for users of the service, feedback for the company to continue to develop its tools, information and capabilities and credibility as they start to move into new markets.

There is risk, of course, in this approach. As others capture new markets they make it difficult for future entrants. Plus it may not appeal to the ego and financial desires of investors. But compare this to those who have attempted to build a site that works globally/nationally, such as CitizenBay (less than 1.5k unique visitors) or StreetAdvisor (less than 3.5k unique visitors), who have minimal traffic and little active membership. The result is “no there there” - the equivalent of throwing a really hip and cool party that no one attends.

#4. Advertising Will Pave the Road with Golden Bricks
While there is little debate that Google AdSense, Yahoo Publisher Network and other site advertising networks have enabled many small sites and bloggers to generate income from advertising on their sites, relying on advertising exclusively to build a viable business is very much in question. Our study found no local sites that are driving big revenue levels and growth rates with advertising only. For advertising to pay off, local players need significant traffic. Yet, many sites have failed to establish a revenue stream of any kind.

Sites with higher revenue levels rely on some combination of service licensing, commission or other revenue streams in addition to site advertising (display, sponsorships and pay-per-click). MerchantCircle is one example of a site that has been able to create multiple revenue streams: advertising (Citysearch, AdSense and directly-sold display ads) as well as member subscriptions.

#5. Bootstrapping: What is Old is Old Again
While some high traffic sites have had limited funding, all the low traffic sites share low funding levels (or no outside investment). So while getting your business well-funded is no guarantee of success, without funding it is very difficult to fuel the product development and marketing that is required to establish yourself and grow.

Without some funding event, many local companies are destined to continue to be niche or marginal players, will die on the vine or become acquisition fodder for others: EventShopper, Savory Cities, and Zixxo.

About the Study
The study was conducted by SmokeJumper Strategy, a Silicon Valley-based marketing and product consulting firm, and was commissioned by MerchantCircle. 80 companies were assessed using publicly available information from Alexa, Compete, Google, SpyFu and Xinureturns. For more information, contact SmokeJumper Strategy.


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Alexa.com is a subsidiary of Amazon.com. It is a website which provides information on traffic levels for websites. The Alexa rank is measured according to the amount of users who’ve visited a website with the Alexa toolbar installed. Alexa toolbar is an application developed by Alexa Internet. Its primary use is to measure website statistics. This toolbar collects as well as gives some valuable information. Once you install it, the Alexa toolbar monitors all your surfing and collects information about what domains you visit. They use this data to rank web sites. The traffic rank they assign to websites is based on 3 months of aggregated historical traffic data from millions of other users and is a combined measure of page views and users. Webmasters, advertisers and ad networks use your blog’s Alexa rank as a gauge to determine the worth of a link on your website. If you depend on link or site selling as a form of monetization you’ll definitely want to increase your Alexa rank, because it’ll increase your bargaining power when it comes to ad pricing.

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