Small Businesses Shirk Advertising

Main Street Swaps Paid Media for Cheaper Digital Options -- by Choice

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Keith Johnson used to be a brand manager with world's-biggest-advertiser Procter & Gamble Co., overseeing Iams' eight-figure annual media budget. But after launching custom pet-food business Petbrosia last year, he's putting most of his marketing focus on influential pet bloggers and email. And he's trying Gannett's daily-deal service, DealChicken, with a half-price offer aimed at signing people up for pet-food subscriptions.

While at Iams, Petbrosia founder Keith Johnson wielded a big media budget. Now, he spends next to nothing on paid ads.
While at Iams, Petbrosia founder Keith Johnson wielded a big media budget. Now, he spends next to nothing on paid ads. Credit: Provided by Petbrosia

Like many small businesses today, Petbrosia spends very little on traditional advertising because it doesn't have to. Given the array of low- or no-cost digital marketing and promotional options, small companies are spending less not just by necessity, but by choice.

"Small businesses have always underspent [on advertising] because they didn't have a lot of resources," said Andrew Whitman, managing partner of 2x Consumer Growth Partners, an investment firm that provides growth capital for small consumer-packaged-goods companies. However, "the new-media world has in many ways leveled the playing field. Now not spending a lot of money can get them something. Not only is it cheaper, it's often more measurable."

But cheaper for how long? Google, which has millions of small and midsize clients; Facebook, which just passed its own million-client mark largely on the back of small businesses; and a seemingly endless stream of new, often mobile, local platforms believe there's plenty of money to be made from the sector. The competition could drive down certain costs, but it could spell the end of some free services.

One thing is clear, though: the landscape for small marketers has changed -- and everyone wants a share of their wallet.

The trend is away from ad spending. As recently as 2006, local advertisers spent more on advertising than promotion, according to Borrell Associates. But local advertising is up just 7% since bottoming out in 2010, reaching $93 billion in 2012, while local promotion increased 47% to $169 billion over that time. Promotion has exceeded advertising in each year since the recession started in 2007.

It would be easy to blame the downturn, which caused 50,000 small corporations, or 1%, to shutter between 2007 and 2010, according to the Internal Revenue Service, the latest year available. The Small Business Administration pegs the drop at 300,000.

But IRS data compiled by Pivotal Research Group show the amount spent per small business on advertising began declining in 2005, well before the recession began. Pivotal analyst Brian Wieser believes that's mainly the result of cheaper digital and social-media options that small businesses are embracing.

Another indicator that small-business promotion is thriving is Groupon, which posted a 42% revenue increase in North America in the first quarter. Groupon deals require no initial outlay by small-business advertisers; instead they get an upfront payment from Groupon of a little less than half what consumers pay. Of course, the small business then needs to fulfill those deals, which in low-margin businesses such as restaurants and retail isn't profitable unless customers repeat. That means promotions need to prove they have long-term value, too.

Digital-marketing consultant Surya Yalamanchili, who worked as a consultant on small business with Groupon last year, said he believes small businesses using Groupon "would have to spend two or three times" the amount they share with Groupon to get the same traffic from newspaper or digital advertising.

But now that digital media has drawn in small business, its challenge will be to monetize these relatively small expenditures. Pivotal's Mr. Wieser said free rides on social and digital media may have cut ad costs, but digital players such as Facebook and Google are working harder -- and in some cases successfully -- to get them to pay.

Mr. Wieser estimated Facebook may have doubled its small-business client base in the past six months alone after it disclosed on its corporate blog that it had a million active advertisers last month. Small businesses that spent an average of $1,000 to $2,000 annually may have accounted for more than half of Facebook's growth in the second half of last year by his calculations and are on pace to do so again this year.

Facebook works for large and small advertisers, said spokeswoman Elisabeth Diana. She declined to say how much of Facebook's revenue growth has come from small businesses, but she acknowledged that with most big advertisers having tried Facebook, recent client growth is coming from small business. Promoted posts, which allow small businesses to pay for premium placement of their posts in fans' feeds without doing additional work, and other tools to make mobile advertising easier have all played a role, Ms. Diana said.

As for Google, Mr. Weiser said it's been running robo-calls urging small businesses to "claim their Google+" pages in an effort to boost search spending. Google declined to comment.

Despite plenty of small businesses having tried digital and social media, there's still room for growth. A survey last year by the National Federation of Independent Businesses found 32% of its respondents have used Facebook, 11% Twitter and 7% digital daily deals. But firms headed by younger owners were far more likely to have tried digital media. "Eventually, the economy churns through that legacy-advertiser base," Mr. Weiser said.

Michele Markham, exec VP-client services at EAG, a Kansas City, Mo., agency that specializes in small-business advertising, argues that digital vs. traditional advertising isn't an either-or proposition. The former Ketchum executive, who also owns three Title Boxing Club fitness franchises, sees digital media as an add-on to traditional media spending for her clients, allowing them access to video, search and customer-relationship marketing they simply couldn't afford in the years when their marketing messages were distributed via TV stations, direct mail or directories. "There are just all these opportunities that didn't exist before that allow small businesses to market themselves better," she said.

Digital isn't the only way to go for small businesses with tiny marketing budgets. PR is another good option -- and it can enable the really lucky, like Corey Ward, to hit it big.

Tom and Chee founders Trew Quackenbush, left, and Corey Ward
Tom and Chee founders Trew Quackenbush, left, and Corey Ward

Mr. Ward is co-founder of Tom and Chee, which launched in 2009 serving gourmet grilled-cheese sandwiches and tomato soup near the county courthouse in Cincinnati. It now has six stores in two states and plans to franchise nationally.Tom and Chee started out with Groupon. The restaurant sold 2,500 Groupons by 10 a.m. the first time it tried daily deals in 2011. But that was when Groupon was a novelty and drive-time radio DJs were talking about the daily deals. So he turned to PR and managed to get his chain appearances on Travel Channel's "Man vs. Food" and ABC's "Shark Tank." The result was 7,000 franchisee applicants from as far as Ireland and Vietnam, along with attention in local media for store openings.

Realistically, Mr. Ward knows most restaurants won't get that much TV exposure. But he still doesn't think they need much advertising. He advises franchisees to do soft openings and invite bloggers, journalists, DJs, chefs and other foodies to sample the goods. He also likes the results from setting up booths at festivals and charity events. And he said outreach to fans on Facebook and Twitter plays a role, though he hasn't paid for advertising on either. -- Jack Neff