When more is less

Writing about Patch last week got me thinking again about one of the perennial challenges that online sales managers face: Finding the right balance between simplicity and complexity in designing your sales plan.

When I was publisher of the Monitor, we worked with an outside sales consultant on a couple of occasions. Before bringing him in the first time, we had spent more than a year trying to build up the online sales expertise of our print salesreps. We held regular sessions on everything from what CPM means to innovative uses of rich-media advertising. We recast and streamlined our online rate structure, and we built in lots of flexibility to meet what we thought would be the key needs of our advertisers.

And we got basically nowhere.

Enter Mike Blinder. He came in, spent a couple of hours talking with us about what we were doing, pulled a simple sales package out his kit, sent a sales consultant to work the market with our salesreps, and in one week we sold more online advertising than we had the previous year.

There are many components to putting together a successful sales drive. But, for us, one of the most important lessons learned from working with Blinder was that simplicity sells. Limit choices, strip out the complexity, reduce the pitch to the core value proposition.

Any toddler parent knows this. Offer a three-year-old whatever he or she wants from the the cereal aisle, and you’ll be there forever. Or at least until you lose patience and leave with a screaming child. Give the kid a choice between Cheerios and Wheaties, though, and you’re done in a flash.

Psychologists and behavioral economists working on decision theory have explored the paradox that having more choices can lead to a worse decisions – or the failure to make any decision. (See the academic work of Sheena Iyengar or the popular work of Barry Schwartz.) And smart advertising sales managers always have tried to make complex print offerings understandable.

But for some reason when it comes to online advertising we have to learn this lesson over and over again. Maybe it’s the pace of change, maybe it’s the inherent complexity of the underlying technologies. Whatever the reason, we seem inexorably pulled into the whirlpool of choices and complexities whenever we try to go to market with online advertising opportunities.

At the Monitor, all of our efforts to be responsive and flexible just led to confused salesreps and unresponsive customers. (At least they didn’t tantrum.) But when we presented advertisers with a tightly designed package for only one ad size and a set number of impressions, they bit. We had moved the discussion away from CPMs and sizes and all the other details of online campaign design to a simple choice: Is this advertising opportunity going to work for you?

In Patch’s regionalized structure, with one or two dozen salesreps serving clusters of a dozen or so sites, I see an chance for them to finesse at least some of the problems of complexity.

First, they can do away with all of the complications that come from trying to combine print and online. That’s a huge benefit.

Also, their salesreps will be able to specialize. That makes it easier for the reps to hone their pitch, and it keeps sales calls focused on one or two opportunities. And, of course, with AOL corporate support they can tap a tier of national advertisers that would be beyond the reach of most small, standalone sites.

For the rest of us, who don’t necessarily have a national sales team or even regional clusters that would support specialized sales teams, it still may be possible to develop a layered sales strategy that provides some of the benefits of specialization.

Some approaches:

  • Pick a set of core ad services, like online display ads and maybe a business blog or PR wire service, whittle each down to the simplest possible proposition, and drive those as the foundation.
  • Introduce scarcity and focus with “limited time” offers and sales efforts. These can be simple refinements of the core ad services.
  • Use self-service portals, outside specialists and blitzes strategically to sell other ad services. For example, you might turn to an outside team to hit the market for a business directory and then handle residual interest through a self-service window. Or you might gear your team up for a one- or twice-a-year blitz.

And now, I think, I can leave aside my minor obsession with Patch…

Patch and the Sonoma paywall

While writing about the Patch business model, I noticed in Romanesko that the Sonoma Index-Tribune dropped its $5/month paywall after Patch opened up in its market.

That action pretty well crystallizes the challenges news organizations face as they move toward paid-content models in competitive information markets. And it suggests that many, or even most, will ultimately fail.

Although incumbent print media may have good reasons to try to get value for their content online, even if only to slow the erosion of their print products, other actors may not be so compelled. Companies like Patch are operating purely under the Axiom of the Audience Imperative, where they rationally will always seek any additional reader they can attract for less than the marginal cost of production and delivery. Since the marginal cost of serving one additional reader online is essentially zero, they will always tend toward free. After all, they have no interest in limiting their attractiveness as an advertising platform by charging for content and restricting their audience.

The only way to escape this imperative is to carve out a non-competitive niche. News outlets could, in theory at least, so distinguish themselves on the basis of quality or depth or timeliness or perspective or ease of use or some other dimension that they can effectively lift themselves out of the competitive fray and charge for access. The Wall Street Journal is probably the best example of this, with its unique value in the business world; the New York Times may have a shot, too, because of its high quality and depth.

And countless publishers are now counting on the unique value of their local news reports to pull off the same trick in their markets.

As someone who hopes they succeed, at least for a while, and who has indeed pushed down the same path, what’s discouraging about the Sonoma reaction is not that they caved, but that they caved so quickly and to such a weak competitor.

I’m not familiar with the Index-Tribune, but it appears to be a pretty typical small weekly, or twice-weekly in its case, with a paid circulation of about 8,000 and a sister lifestyle magazine. (It actually sounds similar to the Monadnock Ledger-Transcript, where I was publisher for a few years, before the paper absorbed the competing Transcript and added a second day of publication.) It has an editorial team of about six. It’s got a Town News-built site; nothing flashy but serviceable.

In September, the Index-Tribune started its paid content experiment. The numbers on Compete appear show a big hit to their traffic, cutting it by maybe a third to a half, but it’s hard to tell precisely, because of seasonal variation and the short time frame. In any case, Patch comes in less than three months into the experiment, presumably with its typical single-reporter staffing plus stringers, and the Index-Tribune throws in the towel.

The inescapable conclusion is that the Index-Tribune’s site and content was not sufficiently differentiated and irreplaceable in the eyes of readers.

Now it may well be that the Index-Tribune is not a very good paper and had no chance of succeeding with paid content, with or without Patch. Maybe all of its 8,000 print readers are just traditionalists who need to feel a paper in their hands, no matter how bad it is. Certainly their website is not as slick as the Patch site, which can’t be helping them in this battle.

But I suspect the Index-Tribune’s experience points to a more discouraging truth, one that will dismay publishers across the country in the months and years ahead, as they try to charge for content while facing an ever-widening array of free, community-based competitors: Our readers don’t love us as much as we think.

For most people, I suspect, general community news is pretty much a commodity. Journalists may see a huge gulf between established players and thinly reported news sites that rely on community contributions, but for many people the competitors are good enough. Readers may still respect and turn to the traditional outlets. But if there’s a free, “good-enough” alternative online, they are unlikely to pony up the subscription fee to support the old standby.

Sigh.

Even so, it’s probably still a good idea for print publishers to push ahead on paid content models. (As long as they do it wisely. And as long as they are prepared to act quickly if conditions in their markets change.) It certainly won’t help their web operations. But it may help to preserve their flagging print operations long enough for them to step smartly into the electronic future.

Patching together a hyperlocal business model

In the forthcoming AJR, Barb Palser argues that journalists should “give Patch a chance.” After all, she says, they’re hiring reporters and making a good effort at doing hyperlocal news.

For all the debate about the work environment and expectations (see the the Business Insider and the Chicago Reader), at least they’re not just ripping off teasers from local newspapers and using that to sell directory listings, classifieds, deals, online display ads and whatever other revenue streams they can conjure. So kudos to them for that.

But I don’t envy them their business challenge.

Several people have weighed in with skeptical looks at the business model. (See this quick list of published critiques.) For the most part, these are prospective estimates, developed before there was much of a track record to evaluate.

Now, with some of Patch’s early sites entering toddlerhood, we’re starting to get a better sense of the business realities behind hyperlocal publishing Patch-style.

And it’s daunting.

Slim pickings on traffic

Compete.com gives an approximation of the traffic coming to various Patch sites. Compete is not perfect, as anyone with access to detailed site logs will know, but it’s a reasonable enough outside view, and at least it gives us a little more to chew on in trying to deconstruct the Patch business model. So far, according to Compete, Patch sites don’t seem to be generating anywhere near enough traffic to sustain any substantive, dedicated editorial effort — even the more established sites.

Last month, according to Compete, the top Patch subdomain attracted fewer than 32,000 unique users. The next subdomain on the list had just over 13,000 users.

Interestingly, that top Patch subdomain was for Ashburn, Va., a site that just launched in October. (As a point of reference, the town has a population of about 88,000.)

The second site on the Compete list, for the far smaller town of Maplewood, NJ. (around 24,000 population), has been around for more than a year. It had its best month of the year in October, when it topped 13,000 users, but mostly it has bounced around between about 2,000 and 10,000 UUs for the last 12 months.

I don’t have the high-dollar Compete membership, so I don’t know how many page views any of that translates into. But Patch overall gets about two visits per user per month, and if you grant them five PVs/visit, you can estimate the October PV volume at about 320,000 for Ashburn and about 130,000 for Maplewood.

It’s pretty tough to develop a business plan that supports ad sales, ad and web production and editorial on top of 320K PVs/month, let alone on 130K PVs/month.

But let’s try.

Hyperlocal costs

The costs are relatively easy to estimate. Patch is apparently paying around $40,000 for reporters, and they have committed to hiring dedicated editorial staffer for each community, with editors overseeing clusters of Patch sites. (See Ken Doctor’s description of the structure.) They’re also paying for freelance contributions, at least initially. With benefits and the rest, you’re looking at $55,000 or $60,000 per site for editorial, ignoring the editorial structure at the cluster level and the freelance budget.

On the ad side, the basic structure as described by Ken Doctor suggests between one and two salesreps per town at final build-out. If they pay their local salesreps no more than their editorial staff, they’d be burning through another $55,000 to $120,000 on local ad sales alone. Call it $80,000 on average for local ad sales, and you’re up to about $140,000 for ad sales and editorial alone.

Then you’ve got production and technology and corporate overhead. That certainly will be centralized. Leaving site development aside as a sunk cost, let’s lowball all of this at $20,000 a year. And let’s assume the operations are entirely virtual, with no local storefront presence.

So we’re looking at a nut of about $160,000 a year per site.

A rough look at revenue

On the revenue side, we can try to build up an estimate by looking at each of the potential revenue streams, such as display ads, marketplaces, directory products, Groupon-like deals and so on.

But first, let me propose a very crude rule of thumb approach that works reasonably well for modestly sized news sites. My experience has been that a very well-run news operation would be happy to get, on an annual basis from all web-related revenue sources, about 40 cents for every monthly PV. So a site with 5 million monthly PVs could gross $2 million annually. A site with 1 million monthly PVs might get about $400,000. More typically, I’d suggest the number is closer to 20 or 30 cents per monthly PV.

But maybe Patch, with all of the accumulated wisdom of AOL and its serious technology and sales chops, will do much better than 20 or even 40 cents per thousand monthly PVs. They’re certainly in a much-better position to get national ads. Maybe they’ll get 50 cents.

For Maplewood, that suggests annual revenue of about $65,000 at the 130,000 PV level. You’re certainly not going to be able to afford a dedicated salesrep and dedicated editorial staff on that kind of a revenue base. And remember, that’s their second-best site, and it has been up for more than a year.

For Ashburn, at 50 cents/K PVs, you’d be earning $160,000. Not bad — they could be breaking even.

But that 50 cents per thousand PVs a month is a tough bar to hit. It depends on flawless local sales execution, great national ad sales support and significant penetration through self-service windows. Certainly, as is clear from even a cursory view of their sites, they’re nowhere near that now.

So what happens if they hit more typical revenue levels? What kind of traffic do they need to support the sites?

Given a more realistic but still generous estimate of 40 cents per thousand monthly page views, the break-even rises to 400,000 PVs. At 30 cents per thousand monthly page views, they’ve got to hit more than 530,000. If they get “just” 25 cents per thousand — a level many community news publishers would be thrilled to reach — they’d need 640,000 PVs/month.

I’ll give them some credit for executional skill. Even though we’ve probably low-balled the expenses, this crude approach suggests the Patch model is doable at about 500,000 PVs a month, but it depends on really good sales execution and a very tight rein on expenses.

A build-up view of revenue

I also tried building revenue up more atomically, estimating the potential from online display sales and other sources. That process is a whole ‘nother thesis in itself. I won’t go into the grinding details, but here’s an overview.

Assume the revenue pillars for sites like this are online display ads (including video, standard IAB units and so on), marketplaces (classifieds and related verticals) and directories (including coupons micro sites and Groupon-like deal programs). There are lots of ancillary revenue possibilities (archives, photos, events, auctions, mobile apps, what have you), but it’s probably safe to assume the Patch sites need to cover their costs with the tried-and-true revenue pillars. That said:

  • The potential for online display revenue is easy enough to estimate; make your own guesses based on average sell rate, spots per page and average CPM. With my most generous estimates, I see a chance to cover about half the $160,000 nut through display sales at a site with 500,000 PVs.
  • The potential for marketplace revenue is also pretty easy to estimate — it’s basically nil. With craigslist, ebay, job sites, car sites and real estate sites killing long-established newspaper marketplace franchises, the odds of a new player gaining a toehold here are tiny. And a look at Patch sites today shows minuscule use of their marketplaces I checked out the four sites with the most traffic that had been open for a year and counted 14, four, six and six classifieds.
  • The key to Patch’s success, then, seems to be in their business directories and in their ability to extend revenue from their directory infrastructure through deal programs, business micro sites and blogs, niche interest sites and whatever else they can cook up. And the directories are pretty darn impressive, with tons of photos, nice layout and good execution on all the things you’d expect. (Check out techcrunch for more on their plans here.)

So can they get $75,000 or $100,000 a year out of local businesses? Maybe. Certainly other small-market online publishers have. Selling directory listings is a tough job, though, with lots of competition. If they can get close to $100 a month or $1,000 a year from each advertiser, the price goal cited by techcrunch, they only need to sell 75 or so to hit the nut. But if they get more like $25 a month, then they have to sell closer to 400 businesses on the listings. In a town like Maplewood, that has to be a pretty high percentage of the potential advertisers.

Ultimately, their ability to sell deals and directories and all the rest (or at least to retain the advertisers they do get) will depend on whether they can deliver real value to advertisers. And that depends at least in part on simple volume. At 500,000 PVs per month, or even a million, precious few trickle down to the listing for any individual business.

Climbing the mountain

Now maybe 500,000 or a million PVs per month doesn’t sound like much to an AOL exec based in New York. And maybe there are lots of underserved towns and suburbs with desirable demographics and commercial centers, all of them just waiting to flock to Patch.

But 500,000 PVs is 12,500 loyal users coming to the site twice a week and looking at five pages each time, for a total of 40 pages a month.

Certainly, Patch sites today don’t seem to be generating that kind of reader engagement. Check out the Compete charts for Maplewood, Ridgewood, Darien and Garden City — all of which have been open for more than a year. They’re all growing decently, but outside of Garden City, which had a spike mid-way through the year, the charts don’t show them on a path to hit 500,000 PVs any time soon. Most importantly, as I noted above, the top-level Patch stats show an average of only two visits per user.

To develop deep reader engagement, with all of the competition and alternatives out their in the real and virtual worlds, you’d better have some useful and lively content resources. No one editorial person, short of Clark Kent, could do that. The only hope is that community members will step up and make the site their own, turning to it as the focal point for community dialogue.

And maybe that will happen, at least in some Patch communities. The sites aren’t bad, and they’ll get better. I wish them luck with that. But how many of Patch’s now-planned 500 sites will strike gold like that? And can they carry the rest?

I can’t help think that when long-established media companies with deep roots and journalistic expertise struggle to develop the traffic and the revenue models that support meaningful journalism online, maybe it isn’t so easy for a tech company to waltz in, hire a tiny editorial staff, stuff a community site with reader comments and rake in the dough.

More reading on Patch’s model

See main post, “Patching together a hyperlocal business model.”

One of the best looks at Patch’s business model comes from Ken Doctor on Seeking Alpha.

The Atlantic Wire raises some key questions about the Patch model and links out to some good resources.

Business Insider’s early take, “AOL’s Patch Revenue Model Makes No Sense,” has been much quoted, but it doesn’t delve far beyond the revenue from display ads.

And check out TechCrunch’s look at the Patch directories.