Local on-demand services continue to dominate press and investor attention. And it’s inherently a local story, so it has likewise snagged the attention of the local media world. But the elephant in the room is the degree to which on-demand could displace local marketing as we know it.
In other words, local marketing in basic terms is an upfront investment to generate demand and acquire customers. On-demand services can achieve that customer acquisition, but in a more direct fashion. Supply and demand are matched in real time and with leaner unit economics.
So instead of traditional customer acquisition costs, local service providers join a network where demand is aggregated for them. They are dispatched to meet that demand right when it happens, including back-office support like payment processing. Their cost is a revenue split.
That’s attractive for many SMBs and micro-entrepreneurs because it reduces upfront capital requirements and risk. It lowers barriers by replacing those marketing and customer acquisition investments with an ongoing service fee. I like to call it the new SaaS for local.
Think of professional drivers — traditionally a strong print yellow pages category. Instead of launching a black car company, marketing, customer acquisition, payment processing and other operational overhead, Uber does all of that for them in return for a 20 percent cut.
Of course there are more complexities to the arrangement, and it isn’t for everyone. But Uber driver unrest and other controversies aside, it has developed a new economic model that’s working for tens of thousands of drivers, including the 10 or 12 per month that I encounter anecdotally.
The larger point is that the impact of this economic model will grow as it moves beyond drivers and dry cleaning to professions like legal, medical and design. That appeals to a wider swath of the working public — including flexibility-craving millennials — to potentially transform local services.
That gets back to the question of displacing local marketing. If the premise is correct that the customer acquisition of on-demand services can substitute that of traditional marketing, it could certainly take a bite out of the $139 billion local advertising pie.
That’s obviously scary for anyone selling local ads. But could that damage be offset if the on-demand economy actually grows the addressable market of SMBs? In other words, does it mostly tap into the micro-entreprenuerial segment that doesn’t advertise anyway?
Do the math: there are 27 million SMBs in the U.S. according to the SBA. About 19 percent of them advertise. That leaves 22 million SMBs that could be the addressable market for on-demand service providers. The total is even higher with non-incorporated “1099” individuals.
So the question for local media companies is if they can or should add on-demand apps to their current ad-supported media products. They already have audiences and SMB relationships — a head start in building network effect for two-sided marketplaces.
More importantly, it’s an opportunity to counteract declining ad revenues by diversifying into SMB operational support. Not only could this tap into a larger SMB universe, but also grow revenue per advertiser (ARPA) and retention, given recurring service fees, a la SaaS.
That’s where the on-demand economy aligns with another important local trend: the “OS for SMBs” (captured well by Steven Jacobs’ “connected local economy“). This shifts the local discussion away from advertising and marketing, and toward tools that help SMBs run their businesses.
The bonus for local media companies is deeper operational lock-in with SMBs. That creates higher switching costs, thus reducing the churn rates that have plagued local media for decades. It’s easier to turn off a search ad campaign than it is an appointment scheduling system.
More importantly, these deeper operational functions are the stuff of on-demand services in replacing marketing with a commerce engine. The way that local media companies evolve with this trend could determine their place in the next decade’s local commerce picture.
Michael Boland is chief analyst and VP of content at BIA/Kelsey. Previously, he was a tech journalist for Forbes, Red Herring, Business 2.0, and other outlets.