This post is the latest in a weekly series of excerpts from BIA/Kelsey’s recent report on the Local On-Demand Economy (LODE). The series will lead up to BIA/Kelsey NOW, a conference on LODE that will take place June 12 in San Francisco.
In all of the excitement and investment in the local on-demand economy (LODE), an important question is what will be its economic impact? This follows our discussion last week of “flipping the model” of local search and advertising. With that backdrop, we sketched out a model to quantify LODE’s opportunity.
The relevant section from our LODE white paper is below as a primer for the discussion we’ll have on stage at BIA/Kelsey NOW. Let me know if you’d like to participate (mbolandATbiakelsey.com) and stay tuned for lots more coverage. Next week’s excerpt: LODE’s Demand Side Dynamics.
Despite some of the takeaways of the previous section, LODE will never fully replace marketing. Many local service providers will still operate outside of the LODE customer acquisition framework, and will need to establish branding to generate demand through traditional marketing.
The question then becomes, what local service verticals are most prone to disruption by LODE, and therefore where and what quantity of revenue will it displace? Verticals whose consumer need is dynamic and urgent are most subject to disruption, such as transportation, as demonstrated by Uber.
As for aggregate revenue, it is difficult to forecast LODE’s impact. But we can apply models to begin to structure potential marketplace outcomes. For example, the local advertising market was $137 billion in 2014, according to BIA/Kelsey, growing to $159 billion by 2019.
To start in basic terms for the sake of illustrating a model for LODE’s impact, let’s pretend it displaces 20 percent of local media advertising by 2019. That would work out to $31.8 billion. This is only a construct, but a useful exercise in beginning to quantify the opportunity (or threat).
Of course this will not play out with such a simple substitution effect: there will be incremental revenues that LODE creates. That’s a key point for any local media companies that are viewing LODE as an opportunity to grow revenue — both through revenue per advertiser (ARPA), and reaching new business.
Similarly, it should also be noted that LODE’s efficiencies in customer acquisition make it tenable for local service providers with minimal marketing budget. Therefore, LODE’s addressable market could exceed local advertising’s current boundaries, and thus a potential growth opportunity.
Quantifying that one step further, BIA/Kelsey projects that 19 percent of small businesses in the U.S. spend money on any form of advertising*. The other 81 percent could represent LODE’s addressable market; and where opportunity for pure plays and local media companies resides.
* Roughly 5.4 Million SMBs in the U.S. advertise. This is usually framed within the 6 million businesses that BIA/Kelsey classifies as SMBs (including having more than one employee). In the calculation above, SMBs that advertise are framed within the larger population of overall small businesses (LODE’s broader addressable market), reported by the Small Business Administration to be 28 million in the U.S.