The problem with online “local” businesses

2009-10-02

One of the most popular areas for startups today is “local.” I probably see a couple of business plans a week that involve local search, local news, local online advertising, etc.

Here’s the biggest challenge with local. Let’s say you create a great service that users love and it gets popular. Yelp has done this. Maybe Foursquare, Loopt etc. will do this. Now you want to make money. It’s very hard to charge users so you want to charge local businesses instead.

The problem is that, for the most part, these local business either don’t think of the web as an important medium or don’t understand how to use it. Ask you nearest restaurant owner or dry cleaner about online advertising. They don’t see it as critical and/or are confused about it. Even Google has barely monetized local.

People who have been successful monetizing local have done it with outbound call centers. The problem with that approach is it’s expensive. Even if you succeed in getting local businesses to pay you, it often costs you more to acquire them than you earn over the lifetime of the relationship.

To add insult to injury, local businesses often have very high churn rates. I have heard that the average is as high as 40%. Anyone who has done “lifetime customer value analysis” can tell you how that ruins the economics of recurring revenue businesses.

Hopefully this will change in time as local businesses come to see the web as a critical advertising medium and understand how to make it work for them. But for now, monetizing local is a really tough slog.

* This is what I hear from industry sources. If readers have better numbers or sources I’d love to hear them.

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