Too Small To Fail

Vertical directory websites offer products for two distinct customer types: brands and merchants. Under the stress test of a recession, merchant customers prove to be the more reliable customer class.

Verticals (e.g., County Home Improvement Directory, for example) have two main streams of revenue: banner advertising sold to brands, and business listings (and/or the resulting leads) targeted at small to medium businesses.

Typically, merchants negotiate a tougher bargain than agencies and corporations. Familiar with Yellow Pages directories, they expect (and demand) superior reporting, phone call tracking, SAAS-grade interfaces, flexible billing models, support for their cellphones and social web buzzword du jour. However, give them what they want – business leads – and their B2B loyalty will make you shine like it did Yellow Pages.

One reason for the continuous success of the directory website business model is the continuous demand to appear in Internet search results. There are tens, hundreds, sometimes thousands of merchants (say plumbers) offering a very similar service to the same geo-targeted audience. Regardless of what you hear about Web 2.0, this situation will stay with us for awhile. Plumbers and lawyers are not hired on a close proximity basis, so even micro-granulated, Firefox 3.5-style geo-targeting will not dent the model. The competition for the lucrative top 10 Google listings for plumbers (or lawyers) is still intense, and directories are simply the closest that a plumber can get there — in terms of number of clicks. Here I beg to differ with Seth Godin’s “Google is the Yellow Pages now” statement in Praized (the Local 2.0 blog)  and we haven’t even began to discuss Facebook with its ridiculously huge metro-wide “networks”. Between Yellow Pages’ “metropolitan areas” and Google’s geo-adjustments there’s a vacuum and that’s where local directories come in.

To further support the case for local directories, and contrary to some common wisdom, consider the effect of the recession. Local merchants seem to be taking the recession better than national brands. This item from the San Francisco Chronicle tells about a recent increase in sales tax revenues in a local town known for its lack of big-name retailers:

While sales tax revenues have plummeted elsewhere, they’ve actually risen in Berkeley. (Union City, Albany and Alameda were the only others in Alameda county to see a year-to-year rise.)The sales tax increase is due, in part, to the quirky nature of the Berkeley economy. The city has virtually no big-box retailers. Instead of shopping malls, the city has clusters of stores in various neighborhoods, Elmwood to Solano Avenue.

The result is that “during times of prosperity, we don’t grow that much,” said Kamlarz. “And during downturns, we don’t decline that much.”

Associating Internet business of any kind with economic stability sounds like an oxymoron. But shift your paradigm – having worked with verticals for years, I am not surprised. Working with merchants is often a personal and very real affair. You talk to the marketing manager and you discover he or she also happens to be the owner (or his or her spouse or cousin). Local merchant are more flexible and dynamic — the decider doesn’t report to a board, and he or she thinks about the business in terms of months, not quarters.

What I am surprised about is that there are but a  few companies developing platforms for merchant directories. Perhaps there are more lucrative paradigms to shift – but given the current economic climate, the place where brick-and-mortar meets the Internet highway could be a very interesting place to be. Some will, eventually, think globally and act locally. If you know or own a dedicated turnkey merchant directory platforms, let me know.

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• Seth Godin: “Google is the Yellow Pages” (blogs.praized.com)