Tricky question, so let me answer it this way:

To measure penetration, we need both the numerator (number of businesses that are using IYP, traditional YP, and BBB)– divided by the denominator ( number of locally-focused businesses).

For the denominator: the traditional number bandied about at tradeshows for local biz in the US (I’m assuming you’re looking at just US for now?) is 16-23 million businesses. However, that’s a highly distorted number, since that includes “hobby” businesses– grandma selling her custom-woven socks and various part-time employment (MLM, ebay sellers, affiliates).

If you go by US census data, there are 6 million firms in the US and 7 million establishments (to account for multiple locations for franchises). Cut that down to the folks who are actually advertising in the yellow pages and you’re about half that.

Now cut out services that aren’t truly local (in my personal opinion), such as insurance or anything affiliate-related. You’re down to under 2 million.

Cut out restaurants and nail salons and you are left with 700,000– primarily professional service firms who have at least $250k in annual gross revenue and have at least 1 full-time employee.

This is the bread and butter of the yellow pages– dentists, car dealerships, restaurants, and attorneys. Net-net, depending on whose numbers you use for a numerator or denominator, you get IYP (Internet Yellow Pages) penetration of between 10 and 20% for claimed listings, and traditional YP penetration of about 50%. I asked Greg Sterling and off the top of his head, he said the 50% figure was about right.

I’ve asked folks at the BBB for their stats, since the latest I see is a few years old– will update when I hear back.

Thus, be very wary of the source of any stats you hear– there is incredible bias, depending on industry role:

• The YP folks (whether YPA or yptalk) like to say the yellow pages are not dead, but are actually holding flat at 84% usage by consumers and $30BN in annual revenue.
• The tree huggers like to say the YP folks are dead in a few years– also an overstatement.
• Then you have industry pundits who will write favorable reports about your company if you pay them a few thousand dollars (Clickable being the most egregious example).

So if you’re looking to sell software products that are under $50 a month, then you have 20 million potential businesses in the US alone, most of which don’t have websites or even enough money to do any more than sign up for a $10/month hosting package for a cookie-cutter site.

But if you are selling as an agency to local businesses that have $2k a month to spend online, then perhaps you have 500,000 firms to go after– the majority of which have websites and are doing some form of online advertising.

So don’t let statistics get in the way of the point you’re trying to make!  After all, there are lies, damned lies, and statistics.

Borrell Associates predicts that in 2009 local online advertising will hit $14.2 billion, while 2010 will be only $14.9 billion– a measly 5% increase.

I would agree that local online ad dollars are not going to grow in the near term– the reason not being hyper-competitiveness, but the exact opposite.  Ad dollars on Google AdWords and Facebook are squandered so badly that why would any business want to throw good dollars after bad?  If Fortune 500 companies can’t get their PPC and listing campaigns right, what chance does a mom-and-pop have?

Enter small advertising agencies, who themselves are local, serving local clients. Arm them with templated PPC campaigns, templated listings processes, templated wordpress site creation, email autoresponders, and all the rest.  Make it idiot-proof, such that anyone (your mom, for example) could do it.

I don’t believe that the giant agency will be able to compete against this new breed, since a call center employee is not as powerful as someone living in your neighborhood who is well-educated, really cares, has less overhead, and is more nimble.  After all, if you’re a one-person agency and are relying upon that income to help support your family, you’re going to take your role more seriously.  You have to see that client face to face– so you better do a great job.

But to empower this hidden or underemployed workforce– the JetBlue moms of the world– a company needs to step in and create a system that is so simple and so powerful that even the ShamWow guy would be impressed.  That is the goal of BlitzLocal and watch as we roll it out over the next year.

You can build the most awesome software, but if you can’t get it in the hands of these analysts– who are franchisees– then it’s no good.  This is the equivalent of the “last mile” problem in telecom.  It’s less a software development problem than one of organized processes to find, train, and manage this workforce.

The definition of local advertising is starting to change as well.  Are industry journal counting Facebook for local, which is now 74% of their 2009 revenues?  How about the services popping up to get businesses listed in the various on-line directories, such that they can increase their number of citations — thereby showing up in maps?  What about video and other types of user generated content?

Thus, on an apples-to-apples basis, the traditional Internet marketing ad channels won’t grow– and neither will the mega agencies that are trying to scale them.  They churn out customers too fast.  But overall, I predict tremendous growth of the one man (or one woman) shop– an army of nimble, hungry folks who will be savvy in using Facebook, Google AdWords, and every other marketing channel available to them. The economy is ripe for some massive entreprenuership in 2010.  Are you a stay at home parent looking for something other than the next Tupperware, MLM, or Acai scam? Maybe you’re looking for some part-time income but were afraid of computers– or are tired of licking stamps.

If you want to join us, send an email to dennis@blitzlocal.com and tell me why.