Deal Radar 2008: Local Marketers

As startups invent new business models to monetize their offerings, one that has become popular is the Cost Per Action (CPA) model. Here’s a company that is trying CPA in the local advertising market.

Local Marketers bears all upfront costs related to online marketing and only recover money from the advertiser after the ad generates a phone call or email. Their goal is to make advertising accountable, so that the advertiser can see the return on investment of his advertising dollars. Customers click on special ‘landing pages’ created by Local Marketers, and only after they call the dedicated numbers or email the dedicated address does the advertiser pay up. The company was founded in 2005 by Mitch Brandow, now chairman and VP of Business Development. Prior to founding Local Marketers, Brandow was Marketing Director of Sedgwick Road (a part of McCann Erickson) and Sony Media Software and Services.

The company has raised $5.1 million: a first round of $600,000 from Madrona Venture Group in December 2006, and a second round of $4.1 million in July of this year. Local Marketers employs approximately 25 people.

Local Marketers works on a pay-per-contact model rather than a pay-per-click model. Fees differ depending on the industry, but range from fifty to a few hundred dollars per contact. The company serves small and mid-sized businesses like plumbers, roofers, and other local businesses that want to connect with customers online.

The obvious downside to Local Marketer’s business model is that the company must bear all upfront costs and risks. If a customer never actually makes the call or types the email, Local Marketers cannot collect any revenue from the advertiser. In effect, an online marketing agency that works for success-fee only, Local Marketer looks to me like a very risky investment on Madrona’s part!

Other players in the local online advertising market are Google, Marchex, ReachLocal, and Yodle. Marchex, another Seattle-based company, recently introduced a new product with reporting tools that help advertisers track the results of calls and emails made as a result of ad campaigns. ReachLocal, one of the bigger competitors, was estimated to be valued at $305 million in December 2007. All these are more traditional, less leveraged models.

Related Readings:
It’s About Place by Calvin McElroy – a discussion on local search and advertising

This segment is a part in the series : Deal Radar 2008