Advertising is the price you pay when customers don’t talk about your business.

In collaboration with the American Chamber of Commerce Executives, SCORE and the Association of Small Business Development Centers, Constant Contact recently conducted its 2009 Small Business Attitudes & Outlook Survey. From April 30, 2009, through June 12, 2009, a broad representation of more than 3,000 businesses were surveyed to better understand how current economic conditions were impacting small businesses. When asked, “What is the biggest challenge you have in running your small business?”, 71% responded that “effectively reaching my audience with limited marketing resources” is their biggest challenge. So, perhaps, it is not surprising to find that small businesses identified sales and marketing as the two areas in which they need the most help.

In response to current economic conditions, 29% of small businesses have actually reduced their marketing budgets. However, businesses are continuing to shift more of their marketing online and, as a result, the majority of these cutbacks are coming at the expense of traditional media. In fact, a recent Forrester survey of more than 200 marketers found that “60% planned to increase interactive budgets by pulling back spending on traditional outlets.” According to Forrester, “the biggest victim of the trend will be direct mail, which stands to be slashed by 40%. Print will not fare much better, with spending on newspapers expected to be cut by 35%, and magazines by 28%.”

Today 25% of small businesses now regularly use online marketing and more than half (56%) frequently use email, however, the vast majority (89%) still rely most on word of mouth to find new customers.

Recognizing the impact recommendations have on their businesses, 92% of the companies we surveyed said customer word of mouth was very important to their businesses’ success. Our latest survey of over 200 retail and restaurant owners and managers helps explain why. Almost two-thirds of these businesses said word of mouth was responsible for generating over half their new customers and, among smaller businesses, the impact was even more pronounced with 75% acquiring the majority of their customers through word of mouth.

In fact, when compared to other forms of marketing, 70% of businesses said word of mouth had the most impact on the success of their business (3 times more than online and email marketing and 10 times more than print).

However, 40% of these companies do not currently allocate ANY of their marketing budget to word of mouth and, of those that do, the vast majority (71%) dedicate less than 10% of their marketing budget on word of mouth.  Interestingly, less than 10% of companies said budgetary concerns were the primary reason for the lack of investment in word of mouth marketing initiatives.

Businesses clearly understand the impact word of mouth has on their company’s success, however, this has yet to translate into increased marketing expenditures on programs designed to generate positive word of mouth for their business. We’ll be exploring the reasons why businesses are not making a greater investment in word of mouth marketing in an upcoming post.

Billions of word-of-mouth conversations happen every day but less than 10% occur online and only 1% (see “Word of mouth goes far beyond social media“) are currently exchanged via social media such as blogs and social networks. The nexus of real-time search and social networking is about to change things and, as a result, we are going to need new ways of storing, searching, and sharing word of mouth as it is increasingly captured and exchanged in the form of online recommendations and reviews. As Greg Sterling points out in a recent post, “the ability to efficiently ask many people for advice or a local business referral at once online is new.  Reviews were step one; the combination of quasi-real time answers and social networks is an evolution of that phenomenon.”

The search interface today is simple, powerful and effective, however, the “one size fits all” approach is beginning to show its limitations. For example, modifiers such as “best” are often included in search queries, however, depending on the situation, “best” has many different meanings.  Using restaurants as just one example, the search for the “best” choice is simultaneously influenced by many factors including time of day (lunch or dinner), occasion (business or social), group dynamics, or even weather (outdoor seating hardly works in Boston in January).  And while search engines have made great progress toward localizing information, it’s important to remember localization is not personalization. This is where our individual social networks will come into play.  Moving forward, I believe our personal network of relationships will help create new, more meaningful ways to organize and filter content and provide the context that search lacks today.