Thursday, January 31, 2008

If You Build It, They Will Come... or Will They?

We recently commissioned a study, conducted by SmokeJumper Strategy, to analyze eighty local internet companies. The purpose of the study was to identify products/features MerchantCircle might acquire that would help complement our existing array of services.

Brent over at SmokeJumper did some nice work on this project and came up with some interesting insights. He identified the "Top 5 Myths" of the local space. Here are our takes on the Brent's findings:

Myth #1. Build It and They Will Come
At MerchantCircle we believe focusing on customer acquisition is crucial (see Andy Sack's great blog on this topic). We believe it is risky to "guess" what local businesses want. Some ideas work, some don't. One of the benefits of scaling quickly to acquire lots of merchants is that we can ask questions of and listen to over 350,000 merchants to help us build great local products. And, at MerchantCircle, we believe our culture is a key to our success. We are constantly trying new ideas and quickly killing the ones that don't work.

Myth #2. SEM = The Holy Grail of Traffic Generation
We believe that any business that relies on SEM to generate a significant percentage of traffic will have a hard time scaling, especially if you're advertising in a competitive (i.e., expensive CPC) regions like San Francisco/New York/LA or competitive categories like restaurants/nightlife.

One key component to winning in this space is the ability to attract new customers/visits via organic or viral means. At last count, MerchantCircle merchants invite, on average, nearly 100 merchants once they sign onto our network. There's still a lot of work to do, but the results are encouraging.

Myth #3. Go Forth and Conquer the World
We have a slight difference of opinion with Brent here: - while it is risky to expand nationally too early, large-scale roll out can work if you have a low-cost, low-touch business model (we may be a bit biased here since this is the crux of our strategy). This approach has allowed MerchantCircle to sign up at least 1% of merchants in ALL 50 states (and 2% in 17 states). Still a long way to go, but we believe we're on the right track.

Myth #4. Advertising Will Pave the Road with Golden Bricks
Relying on any one source of revenue is risky. For those who rely on only SEM or SEO to drive advertising revenue, the risk that prices increase (in the case of SEM) or that your site/directory falls in search engine rankings (in the case of SEO) can have serious, if not fatal, ramifications. And, businesses that sell only SEM services have the opportunity to build a nice, profitable business with low, service business-like margins.

We've tried to avoid putting all our eggs in one basket. By offering a suite of subscription and one-off services while driving revenue via Citysearch listings, AdSense and directly-sold ads, we can to hedge our bets. By all accounts, things are going well: pageviews (3 million uniques and 9 million page views a month)and ad revenue are way up and we've doubled our paying subscribers since launching out paid packages in late December. More to come on this topic...

Myth #5. Bootstrapping: What is Old is Old Again
Yes, you gotta have money to weather the storm and test lots of ideas, but companies need to be judicious with how they spend dollars. We cringe when we hear of local players investing large amounts of money into a sales team. An enterprise sales force on a national level, will cost a company roughly $7 -$10M to put in place. We recently received a Series B of $10M, but you can be certain we will not taking a salesforce approach! Our approach: merchants come first - and lean and mean will win.

Kudos to Brent at SmokeJumper for the great overview.

Darren Waddell
Kevin L.

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