I came across some information recently around pay per click (PPC) advertising that I found pretty intriguing. Specifically, it confirmed to me that PPC advertising is not a feasible ad format for most small businesses (SMBs) and thus a different product will need to emerge in order for the much expected flood of SMB budgets to move online. Here are the first two data points:

• At an industry conference today, Yodle’s CEO claimed that the company did $46m in gross revenue in 2009 and at year-end had 6,000 SMB customers.
• In its recent S-1 filing, ReachLocal reported $143m in gross revenue from 14,500 SMB customers for the nine months ended Sept 30, 2009.

What stuck out to me most about these numbers is just how few advertisers two of the largest SMB PPC agencies have (remember there are 20m+ SMB’s in the US) and how significant Yodle and ReachLocal customer spend is (~$10,000 a year per SMB). These budgets are obviously much larger than those of your average bar or pizzeria or barber shop and why Reach Local primarily serves Physicians, Lawyers and Car Dealers. Yodle didn’t give specifics on its customer base, but I assume it has a similar mix especially when you factor in these datapoints:

• I heard recently that a large pay-per-click ad network averages $1 per click from its advertisers (virtually none of which are local businesses).
• OpenTable’s North American restaurants, on average, spend only $0.68 for each seated diner that comes through the service.

Given that OpenTable services the very high end of the restaurant market, it is pretty clear that just a small number of restaurants, if any, could ever compete with national and high-priced local service providers (i.e. Drs, Lawyers, etc) in the PPC market. After all, as evidenced in the aforementioned data, these latter businesses have annual PPC budgets of $10,000 and are willing to pay upwards of $1 per click

So what does all this mean? Well, there continues to be a lot of talk about local advertising and all of the opportunities for start up businesses in 2010 that focus on this market. I completely agree that SMBs budgets will continue to move online; however, in order for a larger percentage of that pie to shift to digital media, it is now more clear to me than ever that new formats will need to emerge. While I think custom video profiles from companies like TurnHere (a Hearst portfolio company) are one such product due to its relevance to both small and large SMBs, I expect one or two other products to emerge. Given that more local businesses now have a social media presence than a website, I think something that leverages that segment of the market has a lot of potential as well.