Greg SterlingVP, Strategy & Insights, Local Search Association

Data Provided by Vendasta

SMB ADVERTISER CHURN:NEW DATA FOR AN OLD INDUSTRY PROBLEM

December 2015

Greg SterlingVP, Strategy & Insights,

Local Search Association

Key Findings

• This report is based on data from marketing platform provider Vendasta, representing more than 275,000 small business (SMB) customers. The findings in this report are in conflict with some of the earlier data and conventional wisdom surrounding churn

• Several years ago it was not unheard of for SMB-advertiser non-retention or “churn” to exceed 80% per year

• Despite improvements, an informal LSA survey in 2015 still found churn above 50% or 60% among some local marketing services providers

• There is no “acceptable churn rate” in part because there are no agreed definitions of churn or current industry benchmarks

• Six churn variables were identified in the Vendasta data: 1) number of products sold, 2) product pricing, 3) vertical vs. horizontal sales tactics, 4) media category track record, 5) advertiser category track record and 6) service model (i.e., DIY vs. Do-It-for-Me)

• Other potential churn variables, such as customer service quality and contact frequency, were harder to isolate in the data and so not considered in this report

• Of the six identified churn variables only “number of products sold” appeared not to impact retention rates. All others appeared correlated with churn.

• The most prominent factors correlated with churn were product pricing, service model and sales strategy (vertical vs. horizontal)

Table of Contents

Executive Summary .............................................................................................................2

Small Business is Critical to the Economy ..........................................................................4

Figure 1 - Distribution of Firms by Headcount .....................................................................4

Slow Response to Mobile Shift .............................................................................................5

Figure 2 - Average number of channels SMBs use to promote themselves .......................5

Serving the Mobile-First Consumer .....................................................................................6

Figure 3 - Desktop vs mobile users ......................................................................................6

Figure 4 - Mobile used more often for local information .....................................................7

Figure 5 - Most email now opened on mobile devices .........................................................7

SMB Mobility Growing but Uneven .......................................................................................8

Figure 6 - Mobile friendly sites win under Google’s new algorithm ....................................8

Figure 7 - Top five mobile-ready US cities ...........................................................................9

A Mobile Site is Not Enough ..............................................................................................10

Figure 8 - SMBs’ perceived obstacles to creating a mobile site ........................................10

Figure 9 - Transactional capabilities increasingly sought by mobile users ......................11

What about Mobile Apps? ...................................................................................................12

Figure 10 - 90% of time spent with mobile apps ................................................................12

SMB Mobile Checklist .........................................................................................................13

Conclusion: Not if but When ...............................................................................................14

October 2015 | 3

Traditional local media companies, start-ups and agencies have been providing digital marketing services to US small businesses (SMBs) for more than 15 years. During that time there have been major shifts in technology and consumer behavior.

While some digital marketing services best practices exist, fragmentation and disruption are also intensifying as the market becomes more complex and dynamic. Multiple vendors, media com-panies and local sales organizations now compete with each other for mindshare and SMB marketing budgets.

In this environment local advertiser acquisition is a basic challenge. However a greater challenge has been and continues to be SMB advertiser retention.

The term “churn” is commonly used to discuss advertiser non-retention. Churn can be defined as the percentage of total advertisers that terminate (or fail to renew) within a designated period of time, which can be monthly, quarterly or yearly. Absent a contractual barrier, SMB advertiser losses tend to occur within four months after the initiation of a marketing relationship, according to historical interviews with publishers and local marketing technology providers.

According to historical data, anecdotal information and collected industry wisdom, there are many different causes of churn. Some are outside the control

of local media and marketing providers, including the end of a seasonal campaign or SMB business failures. Others, such as disappointed advertiser expectations, exist in an ambiguous zone where the service provider has some control but not total responsibility. Still other fac-tors, such as the availability and quality of customer service, may be entirely within the marketing provider’s control.

The subject of SMB churn has been an informal topic for years. Yet there are still no industry benchmarks surround-

ing churn. Many in the market consider advertiser-retention figures proprietary and don’t disclose them. Though many vendors survey their own advertisers, there has never been a formal study of churn, with the possible exception of a 2009 Borrell Associates report focused on paid search marketing.

Local marketing automation platform Vendasta made its aggregate customer data available as a source for this report in an effort to help isolate and identify churn variables and potential triggers and causes. Using that data, this report takes a closer look at familiar and poten-tial new churn variables. The results are surprising and even controversial.

What Is Churn?

... this report takes a closer look at familiar and potential new churn variables. The results are surprising and even controversial.

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4 | October 2015

Historical Churn Figures

Local Search Association (LSA) data and advertiser interviews show churn among sellers of paid-search and other local marketing services remains relatively high, though the numbers have been improving. A number of years ago it was not unusual to hear of annualized SMB churn rates at or above 80%.

A 2009 Borrell Associates report cited churn rates of be-tween 50% and more than 80% in the context of paid-search advertising. LSA independently confirmed similar figures in off the record interviews as recently as 2013. In 2015 an informal LSA survey still found churn rates above 50% or 60% for a number of marketing vendors.

It is challenging to define an “acceptable churn rate.” As a basic matter, customer churn above 50% or 60% annually should probably not be considered acceptable. Yet this is where a large number of local marketing providers are today. In

the aggregate, these customer losses probably represent hundreds of millions of dollars in revenue annually – though a loss for one provider may represent a new customer for another.

Google research argues that 52% of churn is avoidable, while 48% is beyond

the control of marketing providers (e.g., business failures). This report doesn’t dispute those findings. It assumes how-ever that much of current SMB-adver-tiser churn is preventable with the right mix of products, pricing and service.

Finding the Right Variables

There are no standards governing how to calculate churn. Should it be calculat-ed quarterly, bi-annually or annually and should it be measured only after some initial “probationary” period expires? Local marketing services firm Yodle, in its S-1 filing with the Securities and Exchange Commission, reported reve-nue-retention figures for its “tenured” customers only. A tenured account was defined as one that was at least a year old:

“We refer to customers who . . . remain as

customers after their initial year as our tenured

customers. For the 12 months ended March

31, 2014, we experienced a monthly average

revenue retention rate of 97.5% for our tenured

customers.”

By focusing only on established custom-ers, Yodle can claim that its churn rates are below 3%. But is this an accounting gimmick or a legitimate way to measure retention? By contrast, the company was silent on accounts less than a year old, where the numbers are presumably not as strong.

The earlier Borrell report, which was specific to paid-search reseller pro-grams, argued churn resulted from

... much of current SMB-advertiser churn is preventable with the right mix of products, pricing and service.

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5 | October 2015

two factors: lack of visible ROI and not enough SMB-advertiser budget allocated to media. It thus advocated larger paid-search budgets and a higher percentage for media -- in this case AdWords.

Since the Borrell report many of the ac-count-management problems identified have been addressed through technolo-gy and better use of data. How-ever the challenge of demon-strating ROI to local business owners persists. When SMBs don’t see results fast enough or don’t feel they’re getting value they terminate accounts or seek alternative providers with more aggressive performance claims. Unrealistic expec-tations often fuel advertiser dissatisfaction and churn.

Customer service can significantly impact churn (top two variable). And while local media sellers are working to address a range of known problems, from onboarding to fulfillment and cus-tomer service, churn is far from solved.

The data in Figure 1 are drawn from an LSA-sponsored SMB survey and identify a number of common themes: poor results/ROI, customer service, pricing and so on. These findings are consis-tent with a body of industry knowledge surrounding SMB advertiser churn.

The Vendasta data in this report point to a number of different variables than

those above. They’re likely to be contro-versial but may also offer some fresh inputs for consideration in understand-ing and combating churn.

Figure 1: Sources of SMB-Advertiser Dissatisfaction

Source: LSA-Thrive Analytics, January 2015

Unrealistic expectations often fuel advertiser dissatisfaction and churn.

“”

Poor program results

Poor service levels from providers

Price is too high for the product/service

Too many errors made

Other

60%

55%

45%

30%

25%

6 | October 2015

Data and Analytic Framework

Vendasta’s customer base includes local media companies and digital agencies. The company offers a variety of online marketing tools and services to these providers. The data in this report come from roughly 80 Vendasta partners and the roughly 275,000 small business customers.

The data are from accounts active during a one-year period between March 2014 and March 2015. Accounts not active for the entire period have been excluded. The decision was also made to exclude “outlier” accounts. Those were defined as:

• Accounts associated with discontinued products/services (e.g., shuttered print directories)

• Customers with 0% churn or non-retention of more than 90%

• Customers with fewer than 10 advertisers accounts

• Accounts created and deleted in the same month

Vendasta classified its customers into three publisher/agency segments:

• Digital extenders: media companies that bundle digital and traditional marketing products and use a traditional outside sales force. The bulk of their digital offerings are fully managed or “do-it-for-me” (DIFM) services.

• Digital committers: companies that sell through both traditional and digital-only channels. They offer a range of products and service models: DIFM, do-it-with-me (DIWM) and do-it-yourself (DIY).

• Digital pure plays: companies with lower-cost “DIY” products, usually sold through outbound telephone sales.

The data show some surprising churn correlations. These correlations suggest but do not conclusively demonstrate causation. The findings, however, do offer insights about potential churn

triggers worth further investigation.

Six potential churn factors were identi-fied and investigated for this report:

1. Number of products sold to local advertisers

2. Pricing levels

3. Vertical vs. horizontal sales tactics

4. Media partner industry (e.g., TV, radio, newspaper)

5. Small business advertiser category

6. Service model: DIY, DIFM, DIWM

Other potential variables, such onboard-ing, campaign fulfillment, ROI com-munication and customer service were harder to examine or isolate. In particu-lar customer service plays a potentially major role in account retention, as previously discussed. That variable isn’t explored here because customer service information was not uniformly available in the data set.

The findings ... do offer insights about potential churn triggers worth further investigation.

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7 | October 2015

LSA survey data reflect that local businesses now typically use more than seven marketing methods to promote themselves. By comparison Vendasta said its part-ners were selling an average of 11 different products to local business customers.

Factor 1: Number of Products Sold

There’s a widespread industry view that selling a more comprehensive product suite (e.g., product bundles) prevents churn. Bundles and packages theoretically erect termination barriers by creating greater reliance on the provider (e.g., webhosting). Yet there’s a competing argument that service providers can’t do everything well and too many products complicates sales and fulfillment. One would thus expect a “sweet spot,” with not too many or too few products in the bundle.

The Vendasta data show a weak cor-relation between number of products sold and retention. There are Vendasta partners selling eight digital products with less than 25% annualized churn; others selling the same number suffer more than 75% churn. Companies selling the largest number of products in some cases (23 or more) had lower churn than others selling many fewer products. The clear implication is: number of products sold is not in itself a trigger of churn.

Figure 3: Number of Digital Products Didn’t Impact Churn

Total digital products in bundle/offering

Source: Vendasta customer data representing 275,000 SMB customer accounts (2014 – 2015)

9 16 23

Figure 2: SMBs Use 7+ Marketing Methods to Promote Themselves

2013 2014 2015

66.6

7.2

Source: LSA-Thrive Analytics (February 2015)

Chur

n ra

te

100%

75%

50%

25%

0%

Average number of digital products = 11

8 | October 2015

In contrast to the number of products sold, there was a correlation between product pricing and churn in the data. Companies offering digital products below $100 per month had average annualized churn of roughly 28%. By contrast, those accounts worth more than $100 per month saw 50% average churn on an annualized basis.

This finding is almost entirely unexpect-ed. Even more surprising is that Ven-dasta reported an 8% increase in churn for each $100 per month in additional account value. In other words, the more money spent the greater the churn. This inverse budget-churn correlation contradicts other data and industry conventional wisdom.

There’s a body of industry and agency data that reflects larger-value accounts tend to have lower churn rates than smaller-budget accounts. Part of this may be tied into the sophistication and maturity of the advertiser. The Vendasta finding seems to fly directly in the face of these understandings and logic. What explains it?

One hypothetical explanation for this higher price-higher churn finding is that the more an advertiser spends, the greater the media-performance expectations. The reverse notion is that smaller-priced packages don’t carry the same expectations burden.

Such lower-priced packages typically involve DIY components. As a self-se-lected group, DIY marketers carry different expectations than those buying pricier managed services. In a DIFM scenario, customer demands (even customer sophistication levels) may be quite different. These differing factors and expectations could partly explain lower churn associated with lower-value DIY accounts in the Vendasta data.

This product price-churn correlation is the most striking finding of the study, partly because of its “contrarian” nature. Further investigation is required to see if these findings are replicated in other data sets.

Figure 4: Increased Account Value, Increased Churn

Source: Vendasta customer data

Factor 2: Product Pricing

Monthly price

$100 $200 $300

Chur

n ra

te

80%

60%

40%

20%

0%

9 | October 2015

40%

30%

20%

10%

0%

... there’s now a movement among horizontal media sellers (e.g., newspapers, directory publishers) toward vertical specialization.

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Vendasta media partners employing sales specialization (i.e., verticaliza-tion) saw lower overall churn rates than those selling horizontally across multiple business categories. In comparison with the above this is not at all surpris-ing. Vertical sales channels are able to build marketing programs specifi-cally tailored to the needs of particular industries (e.g., auto dealers, den-tists, attorneys). Not only can sales reps in these situations “speak the language of the customer,” they can focus on industry specific ROI metrics. Indeed, there’s now a movement among hori-zontal media sellers (e.g., newspapers, directory publishers) toward vertical specialization.

The data in Figure 5 show that vertical sellers outperformed horizontal sales in advertiser retention. One surprise might be that the gap favoring verticals wasn’t

larger. Vendasta commented that it had expected churn among vertically orient-ed marketing providers to be lower than the data below reflect.

Figure 5: Vertical vs. Horizontal Sales Impact on Churn

Source: Vendasta customer data

31%

42%

Vertical partners

Horizontal partners

Factor 3: Horizontal vs. Vertical Sales Tactics

October 2015 | 10

The data show significant differences in retention rates by media/publisher cat-egory. This is another striking finding. However there are no good potential explanations for the findings shown in Figure 6 below. Traditional media saw both the highest rates of churn (TV) and the lowest (radio). Newspapers and yellow pages publishers were in the middle.

In our discussions Vendasta suggested that the range and discrepancies seen in Figure 6 may be tied to the experience and maturity of the partner sell-ing digital products. The pack-aging of traditional and digital marketing in product bundles may also be impacting industry performance and churn.

In addition, the term or duration of media buys and packages may be quite different from one media category to other. Whereas digital is an ongoing spend, print yellow pages, newspapers, traditional radio and TV advertising operate on different cycles. This may

also be a factor in the variable churn rates by industry.

While media category appears to be a meaningful churn variable the available data don’t provide much insight into why. What is it about radio companies and their products that make their adver-tisers less likely to churn vs. agencies or TV sellers? What are they selling? How are they packaging and fulfilling?

Are there meaningful customer service differences among these organizations? The Vendasta data unfortunately don’t yield these insights, which are worth deeper investigation.

Figure 6: Annual Churn by Media Category

Source: Vendasta customer data

Factor 4: Media Category Churn

Traditional media saw both the highest rates of churn (TV) and the lowest (radio).

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25%0% 50% 75% 100%

TV

Agency

IYP

SEO/SEM

PurePlay

Newspaper

Vertical

Radio

October 2015 | 11

As with media category, SMB retention rates also appear to vary by industry advertiser segment. For example, as shown in Figure 7, Mining & Agriculture had the highest annual churn while Local Services and Real Estate had the lowest. Is there seasonality operating here? This is again dif-ficult to explain without deeper investigation.

In this category Vendasta advanced the theory that the higher the value of a lead in the industry the greater the probabil-ity of retention. The Financial Services and Auto categories stand out as excep-

tions to that formulation. What is it about the characteristics of the businesses in these industries (or the marketing providers) that make churn more or less

likely? Why should miners and farmers churn more than real estate agents?

Factor 5: Small Business Advertiser Category

Figure 7: Annual Churn by Advertiser Category

Source: Vendasta customer data

... the higher the value of a lead in the industry the greater the probability of retention.

“”

20%0% 40% 60% 80%

Mining & AgricultureTransportation

ShoppingFinancial Services

Industrial GoodsArts

RestaurantsAuto

ProfessionalHome Services

EducationHotels & TravelBeauty Services

FoodHealthActiveOther

Event ServicesReal Estate

Local Services

Annual Churn Rate

October 2015 | 12

A companion finding to the pricing variable above is the discovery that DIY products have lower churn rates than DIFM products. The Vendasta data show DIFM-related churn at between 50% and 60% per year while DIY churn is around 30% or less. DIWM falls in the middle, as Figure 8 below indicates.

The traditional local marketing industry understanding, supported by survey

evidence, is that most SMBs would prefer to outsource digital marketing to a trusted partner or provider rather than try and manage their own accounts. The often-heard assertion is that SMBs want to run their businesses not become digital marketing experts.

One would therefore expect higher churn with DIY products, as business owners test marketing channels and discontinue

Factor 6: Service Model (DIY vs. DIFM)

Figure 8: Annual Churn by Service Model

Source: Vendasta customer data

them because of poor campaign results. After initial DIY experimentation, with search or social advertising, SMBs would be expected to turn to an agency or vendor to “do it right.” And in many cases (e.g., paid-search) this is indeed a pattern.

This logic is overthrown in many cases where there are in-house personal dedicated to marketing functions. But the fundamental assumption that most SMBs would prefer to outsource their marketing may well be mistaken. There is a much more nuanced reality behind these assumptions.

The Vendasta data would appear to contradict the conventional wisdom, as do several SMB surveys conducted since 2013 by LSA-Thrive Analytics, YP and

BrightLocal. They show a majority of SMBs (40% to 65%) managing their own digital marketing.

One possible explanation for these survey findings, partly represented in Figure 9, is that many SMB budgets are not large enough to afford third-party outsourcing. Another is that SMBs that have had bad experiences with outside marketing firms have taken digital in-house accordingly.

Vendasta argues DIY products have the lowest churn because buyers are self-selected and more engaged. By definition they’re not being “sold” any-thing. The DIY offerings across Vendas-ta’s partner accounts are lower priced and, as suggested, may carry lower performance expectations accordingly.

15%0% 30% 45% 60%

DIFM

DIWM

DIY

Annual Churn Rate

October 2015 | 13

Figure 9: SMB Self-Management of Marketing

Source: BrightLocal (2014), n=736 North American SMBs

DIFM packages are typically high-er priced because labor and sales costs factored into pricing as well as additional margin for the agency or publisher. The prices, sales process and outsourced campaign management create performance expectations that by definition don’t similarly confront DIY offerings. A related consideration is that SMBs tend to be likely to blame them-selves for poor campaign performance in a DIY scenario (they’ll blame the

platform instead) than they are to blame a third party in a DIFM situation.

DIWM represents a middle ground, featuring elements of both DIY and DIFM. There’s initial, or ongoing out-sourcing, but SMBs often assume role in campaigns over time. Social media, for example, may be set up and initially managed by third party marketing pro-viders but the SMB gradually takes on more responsibility, eventually generat-ing its own content and updates.

According to the data, five of the six variables examined were correlated with or showed some relationship to churn. Only the number of products being sold did not appear to impact churn. As discussed, two other factors, advertiser category and media-partner category, were also correlated with churn. Yet these findings are probably expressions of other, deeper factors and not causal.

Verticalization of sales and servicing are happening broadly across local media sellers as many people recog-

nize the benefits of specialization. It’s non-controversial to assert that vertical specialization better supports advertiser acquisition and retention.

The top three factors impacting churn thus appear to be product pricing, service model (DIY vs. DIFM) and sales approach (vertical vs. horizontal). Price and service model are not identical but overlapping as discussed; lower-priced DIY packages have better retention than higher-priced DIFM offerings.

Determining the Critical Factors

68%

64%

15% 18%

15% 14%

4% 4%

We handle it ourselves

We use a consultant/

agency

We don’t do any internet marketing

We had a consultant/agency but sacked them

2013 2014

October 2015 | 14

As indicated above these data and findings seem to fly in the face of widely held industry theories and understand-ings of SMB advertiser churn and its causes. The following is a fairly repre-sentative list of the various traditional explanations for churn:

• Creation of high expectations by sales reps focused on closing (“over-promising”)

• Use of different sales/account teams for acquisition and retention

• Lack of sales incentives tied to advertiser retention

• Use of imprecise, inconsistent or undefined sales language

• Overly aggressive or unethical competitors making unrealistic performance claims, which contribute to SMB expectations or dissatisfaction by comparison

• Complexity of various products/solutions negatively impacting SMB’s capacity to understand and sales rep’s ability to sell effectively

• Demanding SMBs seeking “proof of value” amid persistent uncertainty that marketing services “are working”

• Uncertainty about how much performance data to share with SMBs

• Some products/solutions simply don’t perform well and sometimes don’t deliver value commensurate with advertiser spend

• Failure to require sufficient budget or campaign-term “minimums”

• Lack of sufficient advertiser “touches” or insufficient attention to advertisers during onboarding

Figure 10: Five of Six Variables Correlated with Churn

Source: Vendasta customer data

Number of products sold as offering/bundle No

Pricing of the offering/bundle Yes

Vertical vs. Horizontal specialization of the partner Yes

SMB category i.e. restaurants, real estate, etc. Yes

Partner type i.e. newspaper, YP, radio, TV, etc. Yes

SMB service model DIY, DIFM, DIWM Yes

October 2015 | 15

While SMB retention rates have improved in the past several years churn remains a pervasive and persistent problem. Some amount of churn is unavoidable – Google argues it’s has high as 42% -- but more can be done.

The traditional local sales model (relying on outside sales) is under extreme pres-sure because of its high cost. As more local media and marketing sellers shift to telephone sales, SAM acquisition and retention could become more challenging without significant changes in the model. However, operational improvements around sales training, better customer service and more sophisticated use of data to segment prospects and flag at-risk accounts can further improve retention.

The data in this report are provocative and worth serious consideration. Some findings are counter-intuitive; others are inconclusive. Indeed, as the high-school science mantra goes, “correlation does not equal causation.” But the findings should not by the same token be dismissed. They should be further investigated.

For the present, here are a number of recommendations clearly implied by the data and findings in this report:

• More vigorous sales force management and measurement to increase sales efficiencies

• Improved sales training regarding digital solutions

• Offer solutions that lower cost of customer acquisition

• Offer full spectrum of DIY/DIWM/DIFM solutions, including lower cost DIY/freemium solutions with a clear upgrade path

• Sales and service verticalization to better compete with vertical and “pure-play” vendors

• Better (and more accessible) data/ROI reporting

• Deeper back-end integration of products for better performance, streamlined provisioning and fulfillment

• Provide prompt and effective onboarding

• Offer better and more robust customer service and support throughout customer lifecycle

Conclusions & Recommendations

October 2015 | 16