ReachLocal CEO: Company Got ‘Distracted By Shiny Things’

ReachLocal has taken something of a precipitous fall this year. Shares of the local marketing company, which built  its business by selling search optimization tools to small businesses, have dropped by nearly 70% since the beginning of the year, and last week, the stock hit a new all-time low, settling around five dollars a share.

The company started to unravel publicly last fall. Both Zorik Gordon and Nathan Hanks — the two founders who led the company through its IPO in 2009 — left in quick succession. The interim leadership quickly killed their bet on local commerce by spinning off ClubLocal, and then proceeded to botch a reorganization of the sales force in December.

In April, the board hired Sharon Rowlands, a veteran turn-around expert, to take the helm. The fifty-five year old served as chief executive of Thomson Financial in the years leading up to the merger with Reuters in 2008, followed by two short stints leading distressed media companies in private equity-funded turnaround gigs. She has also sat on Constant Contact’s board of directors since 2010.

In an interview with Street Fight last week, Rowlands indicated she would be doubling down on the company’s strategy to build a soup-to-nuts solution in a deeply fragmented local marketing space.

Since the company’s IPO in 2009, and then a bump in 2011, investors have mostly cooled on ReachLocal’s story. When you examine the company’s performance in recent years, how much of that decline stems from broad strategic decisions, and how much from tactics and execution?
Hindsight is a wonderful thing. But frankly, I believe that the company has gotten distracted by new shiny things over the last few years. The previous leadership made a series of pretty significant investments in relatively adjacent areas like [local commerce] with ClubLocal, which we eventually spun off. Having said that, I do think the company did put stake in the ground in building ReachEdge and identifying that one of the challenges that small businesses face is the complexity and fragmentation of the industry.

The company also made some tactical mistakes on the execution front. For instance, the significant change they made to the north American sales operation in December 2013 has had a significant impact on the performance of the company. And while the good news is I think they’re all very fixable, and it’s all blocking and tackling; it doesn’t happen overnight

You spent over a decade at Thomson Financial, selling a pool of technology and information-related tools to bankers and investors. What’s the common denominator between the financial industry in the 2000’s and the small business marketing space today?
At Thomson Reuters I was in charge of 50 different companies, and we developed a product called Thompson One which really unified the business. The strategy was very much about bringing together all of the point solutions for bankers and portfolio managers into a single, integrated experience, and it’s a strategy we’ve also worked into Constant Contact, as they looked to move from a pure email marketing play to an integrated play. In a funny way, it’s a similar opportunity to what we have at ReachLocal.

In a post last week, Fred Wilson offered a great example of the kind of rapid commoditization which tends to happen in industries selling software to smaller business, and it’s something we’ve increasingly seen in the local marketing space. As a software company, how do you increase the switching costs for users — creating that moat around your business — so that you don’t end up in a price war with YP, Yodle and the other companies selling to small businesses?
I think it’s about packaging all capabilities together. By aggregating all of these services, we’re going to be able to give the client a much clearer view into the spending and performance of their marketing initiatives. We have a unique opportunity to use their data in search, per se, to help them optimize across other channels like display

In my mind, if a client is just buying search from you, tactically, it’s not that difficult for them to move from one search provider to another search vendor. But if you can really start to show how you’re driving performance across a all of their channels, I think it’s a much stickier experience: you’ve made the client’s life easier while improving the retention possibility for your customer base.

In the early days, ReachLocal grew by funneling large amounts of capital into a massive, on-the-street sales force. How does the shift in product from one-off reselling of media to a software-as-a-service play impact the way you think about the way you structure ReachLocal’s sales effort?
For starters, I think the economics of the cold call simply do not work anymore. Small business are being cold-called by so many different people that it’s just not an effective method anymore. You need to make so many calls before you get through to a decision maker that it doesn’t make sense from a financial perspective anymore.

Overall, there’s a absolute need for [ReachLocal] to do a much better job of marketing. We need to use marketing and lead generation to bring marketers into the ReachLocal ecosystem, and allow them to start to get some value from our software in a low-touch way. That creates a broader pool which we can watch, and then upsell them into our other capabilities — digital media, et cetera.

The war over the small business is set to explode in the fall with Yodle and GoDaddy gearing up for an IPO, and rumors of YP weighing its options. How does an explosion in meaningful, well-capitalized competition impact your strategy?
First, it’s a huge market — and not just domestically —there’s a particularly huge global market and It’s extremely fragmented. You’ve got a host companies building up point solutions, creating even more complexity in terms of what SMB can buy, and then you have the players trying to aggregate those capabilities. On the one hand, you have companies that want to create do-it-yourself software. But we’re always going to have one foot in the camp of helping you do it.

In the meantime, we are aggressively investing in product development, and in particular developing better methods to optimize across all media types in order to get away from the commoditization of search. At the same time, we need to fix the things we need to fix in the business. The bottom line is that we think 2015 will be a big year for us.

Steven Jacobs is Street Fight’s deputy editor.