At a time when Internet advertising giants are grappling with falling revenue, one local company has been growing by looking where many others haven't: small businesses.

And it's about to take a big step.

ReachLocal Inc. recently rolled out a new service, Xchange, which will allow the company's clients to place ads on more Web sites than they could previously.

Prior to Xchange, ReachLocal helped small businesses buy and place ads only on search engine sites such as Google, Yahoo and MSN. Xchange will allow ReachLocal's clients to place different types of ads on a broader range of sites. For example, a ReachLocal client that sold auto parts could now buy advertisements that appear on a Web site dedicated to car maintenance or car repair.

It's all part of ReachLocal's strategy to stay ahead of what it sees as a growth market.

"There's a huge opportunity for someone to push the digitization curve and help these small businesses get on the Internet," said Chief Executive Zorik Gordon.

The new service comes at a time of steady expansion for ReachLocal. Since it launched in early 2004, the company has expanded from a handful of employees to more than 700, and it's been hiring even amid the downturn. It has dozens of offices in North America, Europe and Australia, and plans to open more this year. Although ReachLocal only started making money in 2005, it raked in more than $100 million in revenue last year.

Gordon credits ReachLocal's growth to its target market of local small businesses that are unlikely to have a strong Internet presence. The company also helps clients gauge how effective their ads are at bringing in new customers what Gordon calls crucial transparency to business owners who don't have thousands of dollars to throw at an advertising campaign.

As ReachLocal thrives, larger Internet ad companies are contracting. Time Warner-owned AOL last week reported a decline in profit and sales. Yahoo Inc. said advertising revenue dropped 13 percent in the first quarter and that it would lay off workers as a result.

The downturn in the sector will likely continue into this year. Emarketer Inc., a New York research firm, projects growth in 2009 Internet advertising will slow to 4.5 percent, or an additional $1.1 billion, after years of double digit increases.

Despite that, there is room for a relatively small, nimble company to grow by selling its services to the countless local businesses that haven't yet advertised online. Those businesses will likely find it more and more important to attract new customers during the downturn, and the Internet is the most cost-effective way to get ads in front of eyeballs, said David Hallerman, a senior analyst at Emarketer.

ReachLocal isn't the only company to see potential in ads from local businesses. In October, Beverly Hills-based MySpace launched a service that helps small businesses design and place ads on the social networking site's pages. But MySpace has yet to expand the service beyond its own pages.

Untapped market

Gordon identified small businesses as an untapped market while he was chief executive at a startup online gaming company in Marina del Rey. He realized that most people had started using the Internet instead of printed phone directories, but small businesses were still buying ads in phone books.

That wasn't because small businesses didn't want to advertise on the Internet, Gordon decided. It was because no one had come up with a service that could guide small businesses through the complex process of buying and placing ads on Web sites.

Zorik left the gaming company in 2003 and with four business partners founded ReachLocal. Now, they have 35 offices on three continents and more than 500 salespeople that go door to door to sell the company's services to small businesses.

"We've come a long way from five guys pushing five desks together," Zorik said.

Part of ReachLocal's success stems from the fact that it is in a market where the larger Internet ad companies have yet to make significant inroads. Behemoths like Yahoo have long seen a lot of potential in local businesses, but have yet to dedicate the resources to tap them.

"For Yahoo and Google, local is part of their world, but they haven't focused on it as deeply, and none of them have built a local-specific sales force," said Tim Cadogan, a former Yahoo executive who is now chief executive of OpenX Inc., a Pasadena online advertising firm.

Still, there are risks in dealing with small businesses that are new to the Internet.

Hallerman of Emarketer gave an example: Recently he was searching online for a bicycle part and clicked on an ad to a local business that claimed to have it. But instead of being taken directly to a page displaying the part, Hallerman landed at the business's home page. After spending several minutes searching for the part, he left the site in frustration.

"If you don't have the appropriate landing pages that speak to what was in your ad, you're going to lose me," Hallerman said.

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