MerchantCircle targets local ad market

MerchantCircle has a simple goal, but challenging—displace the old fashioned printed Yellow Pages and bring local business into a more social Web of commerce. I talked to Ben Smith, CEO of the startup, who told me that the 14 million local merchants who advertise in the Yellow Pages (some online as well as offline) want a better way to express themselves online and to reach customers.
“We want to replace the ineffective, close to extortionist practices of the Yellow Pages,” Smith said. “Everyone is betting the Yellow Pages will solve the problem. They are overpaid, Mafia-like sales guys selling Internet advertising, but they have limited success in spite of the fact they have a huge, dominant sales force knocking on small merchant doors everyday.” The Yellow Pages, he said, is a “big waste of paper.” The 'big waste' also generates about $14 billion in revenue yearly in the U.S., primarily from print ads.
The Mafioso characterization of the Yellow Pages’ sales force is over the top. But, like telcos, the various Yellow Pages operations aren’t adapting to the Internet like a duck to water, and are concerned of undercutting its existing business. Clearly, consumers are increasingly using Web search on PCs, handhelds and cell phones to find local merchants, numerous online Yellow Page directories exist are used by all the major portals.
Smith, who was co-founder of Spoke Software, which delivers contact information as a service, has focused MerchantCircle not just on handling local ad buys, but also on relationships. “We spent a lot of time look at Facebook, Friendster, Linked In and Spoke (Smith co-founded Spoke), tapping into an existing set of social behaviors to solve the big problem on the front end of the local advertising system,” Smith said.  
The startup hopes to differentiate itself with a social interface and a more effective ad model than that of big competitors. Merchants who sign up for the service can create ads, coupons, newsletters, blogs, reviews of other merchants, comments and enable RSS and local news feeds. MerchantCircle buys the inventory and does the placements and search optimization. A key differentiator for MerchantCircle is that each member can create and participate in local commerce networks. Members can include links to each others’ ads and business listings as a way to boost referrals.  

So far, MerchantCircle has signed up 5,000 merchants out of the 14 million national merchant database, Smith said. He plans to have 50,000 merchants signed up by the end of the year and a million by the end of 2007—all without a fleet of salespeople on the street, relying on viral, word-of-mouth growth.
Listings with one ad are free, and for $29.95 per month merchants get four active ads, support and search engine optimization. For $99.95 per month, merchants get unlimited active ads and one-on-one consulting. Smith isn’t disclosing his margins on the various programs, but they will vary greatly depending on the merchant. For more expensive ad word categories (such as real estate), MerchantCircle could lose money, but the company is depending on the long tail to capture the bulk of its profit.
“We run the [ad] program behind scenes,” Smith said. “Merchants could set up their own Google Adwords campaign, and could do better than us if they want to spend two or three hours. With us, it’s 30 seconds, and instead they can spend time in front of customers.”
At this early stage, driven mostly by the early adopters, 20 percent of the participants have blogs and 40 percent are adding extra content, such as blogs, coupons and reviews (such as a nursery with recommendations for landscapers), Smith said.
Smith hopes that MerchantCircle can be an ally for local merchants, who have to compete in the Wal-Mart world. “We have to make it seem like what they do offline," he  said. That will take a generation, but MerchantCircle is at least lowering the barrier to adoption.