The Wall Street Journal today wrote about the challenges that newspapers have in trying to sell to small local businesses. Beth Lawton at the Newspaper Association of America kindly asked us to add some context to the article (subscription required). Here is our piece.

… As The Wall Street Journal article highlights, many newspapers are looking “downscale” to the high volume of smaller local advertisers to make up for their permanent losses in retail and classifieds. About 30 percent of an estimated 10 million local small businesses put the bulk of their marketing dollars into the Yellow Pages. They are “directional advertisers,” and more interested in making sure their phone rings than how many impressions their ads deliver. In fact most would have no sense of the CPM they are paying.

Are Yellow Page publishers vulnerable to such entreaties from newspapers and other local sellers? Sure, but it isn’t going to be simple to take them on. While some portion of small-business advertisers have left the Yellow Pages (typically, more retail-oriented businesses), there is no wide-scale abandonment at this point. Depending upon the category, the return on investment can be remarkably high — even with an average annual spend of $4,800. In addition, Yellow Pages publishers have another advantage: Advertisers want to keep their position, year to year. Consequently, most efforts will be to grab budgets allocated to supplemental books or upsell efforts.

More importantly, at the local level, it is no longer an exclusive club of newspapers vs. Yellow Pages. Local advertisers are increasingly supplementing their YP buy with search engine optimization, search engine marketing, targeted e-mail, featured listings, video production and links, and online promotions. Many are also investing more in their Web sites.

Yellow Pages companies can (and do) provide such products. Many are selling seven to eight products, and because their own sites don’t provide enough traffic, they are syndicating traffic to a wide host of players. In this regard, they are way ahead of newspapers, which are still a world onto themselves — even with smaller and smaller local shares.

Yellow Pages publishers, of course, are not the only ones selling such capabilities. There are a lot of ways of buying Google. A number of other third-party resellers are seeking to sell such services to local businesses, in competition or partnership with Yellow Pages companies. In some cases, they are seeing large monthly budgets of $3,000 to $5,000. Some of these companies (i.e., ReachLocal, WebVisible, Orange Soda, Spot Runner and Yodle) are already working with newspapers, leveraging their strong local brands.

Ultimately, we see that newspapers have strong opportunities to enter these new areas of businesses and expect to see a great deal of new activity in this field. It will go beyond building a few vertical directories. The challenge, as the WSJ article correctly points out, is to get their sales and support activity to scale. While self-serve efforts are rapidly improving, many small-business owners are not ready for a self-service option.

The Kelsey Group forecasts that 25 percent of local online dollars will come from “marketplace” dollars (verticals and classifieds) by 2012. But positioning these marketplace dollars as replacement dollars for traditional newspaper revenues doesn’t do anyone a favor. They are, in fact, exciting new lines of business. As newspapers focus more on their niche and vertical strategies, all this has to become a larger part of their game plan.