Reply bulks up for the local-ad showdown

Purchase of MerchantCircle ads distribution and content engine in time for a 2012 IPO

In a bid to build a local-marketing powerhouse, in time for a 2012 IPO, Reply this week acquired MerchantCircle for $60 million in cash and stock. The deal allows Reply, which sells consumer leads to local and national advertisers, to tap into MerchantCircle’s 1.6 million merchant members who become natural buyers of Reply’s pool of consumers seeking their services.

“The combination of Reply and MerchantCircle represents the largest and most scalable and independent local-marketing platform,” said Payam Zamani, founder and CEO of Reply.

Reply’s acquisition comes at a time the local-market space is heating up, thanks to new companies like Groupon and LivingSocial, which have proven in the past year to be effective tools to drive customers into the doors of local merchants. The market is also crowded with other competitors dominating some area of local, like Yelp and Google, and others like ReachLocal, making their own acquisitions to expand their offerings to local merchants. At the early stages, startups like RedBeacon and Thumbtack have emerged to match local plumbers and guitar teachers with consumers.

Essentially, any company that sells leads to local merchants competes with Reply, said Payam.

That said, Reply would not compete head on with Groupon, said Payam. Groupon is the yin to Reply’s Yang, he said. Groupon’s customers are restaurants, spas and now events, whereas Reply focuses on plumbers, new car dealers, contractors and realtors as well as national merchants. His customer base wouldn’t necessarily be offering daily deals, he said.

Reply would be similar, however, to Demand Media and Quinn Street combined, he added.  This is because Quinn Street provides lead-gen to national merchants and Demand has Demand Studios, its content-production arm creating hundreds of articles that help drive consumers to local merchants.  With the addition of MerchantCircle, Reply plans to compete head on with Demand Studios, by cranking out "how-to" articles, such as "How to find a roofer."

Reply expects to have more than $100 million in revenue by 2012, up about 40% from this year.  MerchantCircle generated $10 million in 2010 and is growing at 60% to 70% annually, said Ben Smith, CEO and founder of MerchantCircle, which was founded in 2005.

I caught up with both Payam and Ben Smith, founder and CEO of MerchantCircle, who becomes Reply’s President upon completion of the acquisition. Ben will be in charge of all of Reply’s websites and traffic growth.

Here’s my interview with both (separately) and slightly edited.

Bambi: Why did Reply buy your company?
Ben: They bought us for three reasons. 1) We owned a lot of organic traffic and we knew how to drive organic traffic.  Reply, on the other hand, buys a lot of its traffic. To this end, MerchantCircle has higher gross margins. 2) We have 1.6 million merchants, which can act as distributors of new products and services. 3) Reply is going public next year, and we could improve their metrics whether it’s their overall critical mass or margins.   

Bambi: How much revenue will the combined company generate and what is MerchantCircle’s portion? Ben: We’ll generate $100 million in trailing sales by early 2012.  We’ve generating more than $10 million in 2010, growing 60% to 70% revenue growth rate annually.

Bambi: Where does the revenue come from? 
Ben: The majority of revenue comes from local advertising, most of it being from people buying leads or traffic. MerchantCircle makes 60% lf its money from ad networks, like Google’s AdSense or CityGrid.  The rest comes from merchants buying leads, badges that they go on their pages.

Bambi: Please explain how they buy a lead.
Ben: We put a lead in their inbox. Give them a summary of the person and that person’s needs. We say, “If you want the lead, it’ll be $40. “ Or they buy all plumbing leads in the town.

Bambi: What do they pay?
Ben: It varies. What an opthalmologist would pay is different to what a plumber would pay.  A plumber in Dallas would pay about $45 a lead. A doctor would pay much more.

Bambi: Is this better than a click from Google and what’s the conversion?
Ben: What we have found is that most local businesses, don’t understand what a click is. They want to buy a lead. They want us to do all that work to get a qualified lead.  (Ben would not discuss conversion only to say it varies on merchant.)

Bambi: What will you your new role?
Ben: I’ll be President of Reply Media, which means I’ll handle traffic and the 25 consumer-facing properties, which include Merchant Circle, Bloglines, iMotors, Reply.com and Contractors.com. I’ll also be in charge of growing traffic.

Bambi: What are your plans to grow traffic?
Ben: We’ll launch another set of local sites that address specific needs. You’ll see sites on roofers and plumbers and stories about “How do you pick a roofer?” We announced our local content studio, which includes a freelance network of writers.

Bambi: That’s what Demand does with Demand Studios. What’s your advantage in finding these freelancers?
Ben: Our advantage is that we have 1.6 million local merchants out of 30 million seeded. We’ll tap into them.  Thousands of merchants have already written for us. Sometimes they’ve done it for credibility and sometimes we pay $100 for a story, or as low as $5 for a comment.

Bambi: How does your lead product for merhants work?
Ben: Merchants can earn leads for free. They do things that help the network, like write content and answer questions, and they get leads for free.

Bambi: What kind of merchants are in your community and how much do they pay on average per month?
Ben: Roofers, landscapers, window replacement, dog fence people, wedding planners. And, they pay us hundreds per month. 

Bambi: Thanks, Ben

Interview with Payam

Bambi: Give us some background on Reply.
Payam:  Our Reply Marketplace, which has been around for the past few years, is equivalent to Google AdWords, but for the acquisition of locally-targeted traffic. We are a buyer of traffic through search and social media. Our ads would attract local merchants wanting to buy a car and we’d take them to a page that asks them to provide us with more specifics. We then take that packet of information and run an auction against it on a cost-per-click basis.  That package of information allows us to categorize consumer intent and consumer location (where they want their service rendered).

Bambi: Why is this better than buying a click on Google?
Payam: Advertisers don’t need to worry about keyword management. (No need to manage the words plumbing, toilet bowl, etc.) They simply put in an order: “I want a plumbing customer for 94506.” When a consumer wants a plumber in that zip code, the plumber has the option to buy that lead on a cost per click or lead basis. The advertisers bid against each other to get their services in front of that potential customer. 

Bambi: How much are the leads or cost-per-clicks?
Payam:  For real estate, advertisers can bid 30 cents per click. For home improvement, clicks can go to $9 per click. For a lead, the average lead is $50.

Bambi: What kind of advertisers go to your site?
Payam: There are three types of advertisers who come to our site. We have local advertisers, aggregators (Autobytel, Service Magic – coming to us to buy traffic where they have merchants but not enough traffic), and national brands that have locally-targeted needs. For example, Ford comes to us and buys traffic for their dealerships. Sears comes and buys traffic for home-improvement professionals.  

Bambi: How much traffic do you have?
Payam:  It’s not that high. We have about 5 million actual visitors that come to us to be matched for a service. But all can be sold through our marketplace on a cost-per-click or cost-per-lead basis.  On average, the revenue from leads represents a higher percentage of leads.

Bambi: What kind of advertisers prefer leads over clicks and visa versa?
Payam: In the case of real estate, it’s clicks, and for automotive, it’s more leads. For auto dealers, they develop leads and that’s a standard way to work on the Web.

Bambi: What’s your revenue this year and next?
Payam: Revenue this year will be $70 million. Next year, we’re projecting more than $100 million by the end of 2012. 

Bambi: What’s MerchantCircl’s proportion?
Payam: We didn’t buy MerchantCircle because of their revenue. The size of their traffic and number of merchants that have engaged with them is the most valuable. This is valuable to us because we’ll have access to couple million merchants and 20 million local consumers visiting the website. The number of merchants they engage with is massively more than Reply has. They represent the portion of merchants that are more likely to engage. We also expect the two million merchants will expand our distribution capabilities. For example, MerchantCircle has hundreds of thousands of contractor that are putting up coupons on their profiles and they’re communicating with other merchants. 

Bambi: What was the breakdown for the acquisition price and was there an earnout?
Payam: It was a combination of cash and stock. No earnout.  But we did make equity available to the team on top of the $60 million to meet goals. We also made it possible for shareholders to take either cash or stock. The majority said they’d prefer to take all stock.

Bambi: How much money have you raised?
Payam: We raised $17 million in equity and about $15 to $20 million in debt (most of which is paid off). But we took on more debt for this deal.  (New debt is not disclosed.)

Bambi: Who’s taking you public?
Payam:  We are in registration. We’ve not updated it in months. The lead was Jefferies. But all decisions around our IPO have to be revisited.

Bambi: Thanks, Payam

(Image source: Internetretailer)