A couple of interesting insights from the S-1.
- ReachLocal sells their service on a fixed fee basis, but buys media in auction marketplaces (everybody knows that search is an auction, but most display networks essentially operate through a similiar auction approach where the impression is sold to the highest bidder). From a sales/marketing standpoint, this makes a ton of sense as most local businesses have failed at buying search campaigns directly because of the need to manage their bids daily.
- This practice leaves ReachLocal exposed if prices increase and in a position to profit handsomely if prices decrease. I was surprised to see two things: first, Reach Local spent 55.6% of the advertising fees it charges local clients on media. If you compare this to a typical agency that may get 15-20% of the media spend, this is really, really high. Basically, a local advertiser is paying 2x to ReachLocal rather than going directly to Google. I've heard the pitch before and I know that ReachLocal's will tell you that their keyword generation, bidding and optimization tools result in most local advertiser's that were spending in Google actually spending less and getting much better results. Having bought a lot of search, I can believe that. The nature of local advertising probably results in a lot of opportunity in the long tail and some good technology can unlock that opportunity. My concern would be about how this plays itself out over time. If ReachLocal, Yodle and Dexknows are reasonably successful, they may end up squeezing each other's margins unless they can effectively pass through the price increases to advertisers (which maybe they can).
- On that note, ReachLocal only spent 52.7% of the advertising fees they charged on media in 2008 vs. 55.6% in 2008. Considering the awful local advertising market in 2009 - in general - I find that suprising. Would have thought this would have been a year when their gross profit increased because there were a lot less local advertisers spending on search.