'Instant gratification moments' key to ChaCha's biz strategy

September 1, 2008

By now, you’ve seen the T-shirts and ubiquitous red advertisements on the sides of city buses. Carmel-based ChaCha Search Inc. has been winning accolades and enough teen fans to rival Hannah Montana. But none of that makes it apparent how the company can make money giving free answers to random cell phone queries.

ChaCha thinks it has the answer: by charging advertisers for immediate access to the people asking the questions.

Users don’t need to pay for using ChaCha’s popular service because the company is selling something far more valuable: hyper-targeted access to interested consumers at the precise moment their curiosity is at its peak. ChaCha calls them “instant gratification moments.” That’s an opportunity marketers dream about.

ChaCha isn’t the first company that’s attempted to earn cold, hard cash off a popular, free, high-tech service. Many a fast-growing Internet startup had similar ideas, back before the dot-com bubble burst. But ChaCha co-founders Scott Jones and Brad Bostic believe they’ve found a business model that will turn huge profits.

Now all they have to do is prove it.

“The monetizing phase is the next phase of our company,” Jones said. “We’re kind of at the precipice, right at the outset.”

Jones predicts the company will start making money on each query as soon as the first quarter of 2009. Bringing on big advertisers like Coca-Cola, which signed on in July, will help. So will improving the efficiency and response times of those who answer queries. Because of high startup costs, it will take quite a bit longer for the company as a whole to get into black ink.

That will depend on how receptive advertisers are to ChaCha’s service.

Cell phones and text messaging are now a part of everyday life, but as an advertising medium, mobile devices are in their infancy, said Greg Sterling, president of San Francisco-based mobile market analysis firm Opus Research.

Lots of companies are intrigued by the theory of pinpoint mobile ads, Sterling said. But the premise quickly becomes dauntingly complex once you introduce particulars like pricing and how to measure the effectiveness of ads.

It’ll be years before the mobile ad money really starts flowing, he predicted.

“Consumers are using the Internet on the phone and sending billions of text messages. There’s a reality now that didn’t exist in the past that creates opportunity. But it’s going to take a while to catch up to the consumers,” Sterling said. “It was the same with the Internet. How long can you survive without water until you get to the oasis?”

The big idea

He’s 47, but Jones still has the exuberance of the teens ChaCha targets in its marketing. The voice mail pioneer founded his latest company with Bostic in 2006. Since then, ChaCha has raised $16 million from a group of heavyweight investors that includes Amazon.com founder Jeff Bezos and Compaq Computer founder Rod Canion.

The group raised $3 million of the total in a private placement in May. Indiana kicked in another $2 million last year through its 21st Century Research and Technology Fund.

The money has gone toward development of ChaCha’s IT and service, including putting together a network of 33,180 people who work from home providing the responses to all those random questions. ChaCha calls them guides.

The guides are paid by the query and typically earn $3 to $8 an hour. Guides who screen initial queries make the least. They direct calls to generalists, who research questions that defy easy categorization, and specialists, who are paid the most.

When ChaCha launched, queries were received and answered via computer. Now the business clearly emphasizes mobile phones. Jones insists that was the idea from the start, and still has the original back-ofthe-napkin plan to prove it.

ChaCha launched its service answering questions via text messages in January and followed up with a voice-based service in April. Teens immediately embraced it. Jones said ChaCha’s number of inquiries has increased 89 percent a month this year. In August, it topped 9 million.

The appeal is simple, yet powerful.

“It’s easy. You don’t have to memorize some kind of specific keyword to send in. You just ask the question like you’re asking a smart friend, and ChaCha gives you the answer,” he said. “That’s what appeals to people: the easy experience. They know how to ask questions.”

The “American Idol” set aren’t the only ones who like ChaCha. Last month, for example, Frost & Sullivan, a global company that evaluates product marketability, gave ChaCha its 2008 Product Innovation award. Three months earlier, The Wall Street Journal’s personal technology columnist Walter Mossberg devoted a whole column to ChaCha.

“Overall, I liked ChaCha. In most cases, I received fast, accurate, useful answers. But it has two weaknesses. One is that the low-paid, part-time guides can provide inconsistent service. When I asked for the best Mexican restaurant in D.C., for example, ChaCha came up with a choice few locals would cite,” Mossberg wrote.

“The other is that, unlike many other cellphone information services, ChaCha doesn’t automatically know your location,” he continued. “So unless you include a location in your query, it’s clueless about questions such as, ‘Where’s the nearest drugstore?’”

A promising test drive

On average, each ChaCha user initiates 27 inquires a month. Every query is a sales opportunity—if ChaCha can find a way to package it for the right advertiser. It works like this: Say you’re curious to learn who won the first Brickyard 400. ChaCha will quickly respond with the free answer: “Jeff Gordon.”

But in asking the question, the user has revealed critical information about himself or herself. ChaCha recognizes it’s found a stock car racing fan, and follows its first answer with a pitch from Coca-Cola offering free NASCAR gear.

ChaCha announced its Coke deal July 31 after kicking off the partnership July 27 at the Brickyard 400. Terms weren’t disclosed, but ChaCha touted the fact that 5.2 percent of users “clicked through” its Coke texts to view Coke ads. That doesn’t sound like much to an outsider, but it compares to a less-than-2-percent industry clickthrough rate, according to ChaCha.

ChaCha has ideas like this by the dozens. Say a user calls in asking, “What’s the first flight from Indianapolis to Chicago today?” ChaCha will give the flight time, then follow up by peppering the user with more questions. Would you like to book the flight? Aisle or window seat? Do you need a rental car? And so on.

ChaCha says it will provide objective answers regardless of who advertises, but it’s not clear how the company will balance the interests of callers and advertisers.

Another opportunity for growth: striking deals with cell phone companies to take over their 411 directory assistance service. Cell companies typically charge up to $1.75 for a simple query about business addresses and phone numbers. ChaCha thinks it could provide more customized information for a fraction of the cost.

ChaCha sees big promise in automating the process of answering queries. It adds every question it answers to a growing database. Guides need to answer only queries ChaCha has never encountered before. Jones and Bostic believe that’s the key to growing the number of users in dramatic fashion without a corresponding increase in costs.

“We’re quickly building the world’s largest database of accurate answers,” Bostic said. “If you just think about the implications of that, they’re pretty powerful.”

Haggling over price

Advertising experts love the idea of reaching target consumers at the most opportune moments for sales. Tom Hirons, president of local advertising agency Hirons & Co., said mobile marketing will become an important part of many campaigns.

“Particularly youth markets are using their cell phone as the primary information device. Text is a preferred platform,” Hirons said. “So it’s an ability to reach an audience that’s currently very difficult to reach through traditional media.”

But there are plenty of hurdles to jump. First, ChaCha must make sure its service truly feels free for its users, especially those who pay for each text they send or receive.

Tom Moore, president of local cell phone retailer Everything Wireless Inc., noted that in Europe wireless advertising is common. But people aren’t yet as comfortable with it here. That’s evident if you consider the many parents who fail to buy unlimited plans for their teens’ phones.

“We’re seeing parents who didn’t buy unlimited text and they went 4,000 over and now owe $400 when you could have bought an unlimited plan for 20 bucks.”

Other hurdles could be harder for ChaCha to overcome. Purdue University communications professor Jake Jensen teaches advertising. He noted that new technology usually debuts with the promise of opening lots of advertising opportunities. But the reality often doesn’t match the hype.

Digital video recorders, for example, initially seemed to offer a similar chance to measure an audience’s specific interest and deliver customized ads. But when people began using them to simply avoid watching ads entirely, the profit path became a lot muddier.

Perhaps most important, Jensen said, businesses that advertise via ChaCha are going to want proof their marketing efforts are actually leading to sales—and that ChaCha receives enough queries about a particular subject to justify what the advertising costs.

“That’s where advertising tends to run lean,” he said. “A lot of front-end expense and flashy lights. But when it comes to the evaluation at the end, that’s where it starts to get a little thin.”

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