Even though barely in the market, there have already been numerous industry articles written about “pay per call” (PPCall) online advertising. Probably everyone reading this is at least generally familiar with its core proposition: driving phone calls rather than clicks.

Most of the articles to date have given a qualified endorsement to the “new” medium, which is only new online. The idea of using toll-free numbers to track and bill for leads has been around in principle and in limited practice in the cable TV industry and the directory industry for years. Yet the ascendancy of pay-per-click advertising—now responsible for at least 40 percent of online ad revenues—made it inevitable that someone would try to create a medium for the millions of U.S. businesses that rely on the phone to generate leads and close sales.

Recently, The Kelsey Group issued a report on PPCall, which estimated that by 2009 it could potentially generate between $1.4 billion and $4 billion in gross revenues. Given the recent introduction of the product, it was extremely challenging to develop the forecast.

A number of media outlets characterized our forecast as “bullish.” Admittedly on the high end it is, but directionally it’s accurate.

In developing the forecast, we used the historical performance of Internet Yellow Pages’ (IYP) call-contact rates and projected growth of search volume, which is where the PPCall ads currently appear. For the time being PPCall is running on AOL and MIVA’s (formerly FindWhat) distribution network. Very soon, however, PPCall availability and distribution will expand.

In translating calls in an IYP environment into a search environment, we discounted the anticipated telephone contact rates substantially. The reason is that while call rates in IYP are roughly 50 percent—every two IYP lookups generates one phone call on average—click throughs on search engines average about 3 percent to 4 percent. That’s a striking discrepancy.

Simply putting phone numbers in ads that appear in search-engine results doesn’t guarantee higher contact rates—or calls to those advertisers.

The differences in IYP and search performance can be explained, to a large degree, with reference to user intent. IYP benefits from the offline print yellow pages usage legacy—consumers consult print directories at a typically late stage in the purchase cycle, when they’re “ready to buy.”

Though perhaps too simplistic, consumers use search engines much earlier in the buying cycle and more broadly than IYP directories, which is why there are so many impressions relative to actual clicks. However, search traffic is much greater than IYP traffic volume. (Over time, search and local search will improve considerably and the gap will narrow.)

Another thing that made forecasting the potential of PPCall challenging was the fact that vendors are offering a variety of different product and pricing options. Some calls will be and are being sold at flat price points, while others are sold at auction. (And then there’s call tracking, which is a related but different product.)

Directory-social networking site InsiderPages.com, for example, only sells calls to local advertisers at a couple of fixed price points. A few other publishers are likely to use flat pricing as well. MIVA and Ingenio (which is behind the MIVA product and distributes via AOL), by contrast, use an auction model similar to pay-per-click. However, bidding is by category rather than keyword.

Leading PPCall vendor Ingenio disclosed to The Kelsey Group that calls on its network are “averaging in the $6.00 to $7.00 range within two months of launch.” The company requires a minimum bid of $2.00 per call. And while the bid prices in certain verticals could thus increase quickly and drive revenue growth, some argue that auction pricing will limit penetration among local businesses as one might argue it has with pay-per-click.

In addition to pricing uncertainties, there are related questions about sales channels and whether this will be a pull or a push marketplace. Pay-per-click started as the former and is increasingly being pushed to the local market by small business aggregators.

If yellow pages or newspaper publishers adopt PPCall (which we expect) their “feet on the street” can push it to local merchants, which will accelerate adoption.

There are probably more than 20 million small businesses in the U.S., depending on how you define “small business.” Most of those businesses do a majority of their buying and selling locally and a relatively small minority of them currently advertises online. But they will eventually be forced to do so given consumer adoption of the Internet.

Of course, PPCall will be adopted by large organizations that want to drive phone calls rather than clicks under certain circumstances (i.e., higher-consideration purchases).

But among local businesses, PPCall adoption will be driven by the confluence of a number of factors:

  • Broadband consumer behavior (the Internet is increasingly used for local searches)
  • Familiarity and comfort with the phone as a sales tool to handle and close leads
  • Consumer propensity to use the phone to contact local businesses
  • Absence of a website requirement (a specialized landing page is created)
  • Fear of click fraud (PPCall is a cost-per-lead medium)

Based on the experience of using yellow pages and newspapers consumers are used to making calls to contact local businesses, which are themselves used to closing leads over the phone. Thus PPCall is a natural for local businesses.

It’s not clear yet whether PPCall (in all its potential forms) will substitute for pay-per-click adoption or whether many local businesses will adopt and use both. It might break down on a product seller/service provider level. In other words, service providers may opt for calls, while local product sellers pursue clicks.

Roughly 20 percent to 30 percent of local businesses sell products. The rest sell services in one form or another.

The local market represents almost $100 billion in traditional advertising spending on an annual basis. Grabbing even a tiny piece of that market is a big opportunity for PPCall.

Discuss this article in the Small Business Ideas forum.
July 6, 2005

Greg Sterling is The Kelsey Group's managing editor and the program director of its Interactive Local Media program. He conducts research and writes extensively about online advertising and local search. Greg came to The Kelsey Group from the former ZDTV, where he conceived and produced the Web site accompanying the first national television show dedicated to e-business and the Internet, "Working the Web." Before that, he was a founding editor and executive producer at AllBusiness.com, a leading small-business ASP and Web site. Prior to that time, Greg was a practicing attorney in San Francisco. He has also worked as a freelance writer and editor on a range of subjects for numerous online and traditional publications.

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