When tech entrepreneurs Wayne Yamamato, 43, and Ben Smith, 38, met back in 2004, they decided they would start a business together one day. Their 'aha' moment arrived at one of their weekly brainstorming meetings at a Palo Alto (Calif.) coffee shop, after spotting a sign advertising both a hot dog hut and a bike shop across the street. They figured that a similar agreement between local business owners would be difficult to reach online because a destination where owners could meet and get to know one another's businesses simply didn't exist. Creating an online place where owners could post business profiles, advertise, network, and endorse one another for free, thought Yamamato and Smith, would result in the introduction of millions of businesses not currently online to the Web (see BusinessWeek.com, 2/14/07, "Dialing for Small-Biz Dollars").
The result is the less than one-year-old San Francisco-based MerchantCircle, an online local business directory with some 15 million prepopulated individual business listings that an owner with little Web experience can "claim" and customize with ads, coupons, and newsletters at no charge.
Using data obtained from public records and a proprietary Web crawler developed by cofounder Yamamoto, the eight-employee MerchantCircle builds the listings, then relies on merchants finding listings through word-of-mouth and search engines. MerchantCircle optimizes each entry in the directory, so that it gets good placement when it is picked up by major search engines such as Google (GOOG). "We make it easy for people to link to your site, make it easy for merchants to create new content, and tag it in a way the Web loves. Google wants people to be able to find stuff that they're interested in. For a small-business man to do that himself would be impossible, but we're applying that [technology] across lots and lots of merchants' pages," says Yamamoto.
MerchantCircle also hopes to appeal to small-business owners by aggregating every review and consumer-generated posting about a specific business on the Web in one place—in essence, providing a way to manage a business's online reputation. Whenever a comment is posted anywhere on the Web, the business owner can read about it almost instantaneously on the free online dashboard provided to each of the businesses with entries in the directory. It's an effective way for the "merchant to understand what's being said about them and…decide how they want to manage it," says MerchantCircle cofounder Smith.
"We were looking for some way to bring mainstream merchants online in a comprehensive way—trying to get two to five million to come online. It would change their economics and change things for customers," says Smith, who adds that at least half of the companies who have claimed a listing use it as their sole Web site. So far, 85,000 businesses have registered. Think of MerchantCircle as a MySpace (NWS) for small-business owners.
How to Make It Pay
So how does the company make money? The basic services are free, though MerchantCircle does offer two premium services for $30 and $100 a month. The $30 plan allows businesses to place up to one ad on a major search engine per month and gives these subscribers priority with technical support and marketing questions. The $100 plan allows subscribers to create and post up to four rotating ads per month on major search engines, pay for ads on major newspaper sites, and pay for ads on 411 phone directory calls. For the call service, MerchantCircle has an agreement with Menlo Park (Calif.)-based 411 advertising company Jingle. The service works like this: If someone calls 800 FREE-411 and asks for a pizza shop in Des Moines, Iowa, and MerchantCircle has a $100 premium subscriber in that region, the ad is simply served in front of that call.
But selling the premium packages remains an afterthought for the cofounders, at least until they build their base of business owners who use the free services. "Our view was and still is—let's grow the largest number of users. It doesn't cost us a lot to help them do it. Once we've done it for one, [doing it] for 14 million doesn't cost much more," says Smith.
But just because the number of merchants who have claimed a listing has grown from 5,000 to 85,000 in just over six months, that doesn't mean the company has it made, says Matthew Booth, program director for interactive local media for Princeton (N.J.)-based research firm The Kelsey Group. "The 85,000 businesses that have signed up are not paying customers. They are businesses that have 'claimed' their business page," says Booth. Many companies have something similar, including Google Maps and Yahoo! Local (YHOO), " but MerchantCircle does a good job of using search engine optimization so that that these pages are discoverable," says Booth.
Getting that base of 85,000 users to return to the page is a big challenge, not to mention turning them into paying customers. Though they say they expect to have 500,000 merchants by the end of 2007, MerchantCircle executives won't disclose their number of paying customers or revenue numbers. But Booth says the fact that MerchantCircle has created a single page where owners can log in and see all the customer reviews could draw them back. "Product development like this should help drive the return rates higher over time. They'll just need to find the right mix for the business owner," he says.