March 7, 2006--While more and more small firms are identifying the Internet as a way of targeting local customers, for now, the majority still rely on word-of-mouth advertising, according to a new survey.

The survey, which was conducted by Wells Fargo/Gallup in early January and released March 1, found that more than half of 600 small-business owners polled nationwide felt customer recommendations were more effective than costly advertising campaigns.

A full 45% said they spent no money on advertising in 2005, and of those that did, 67% ran ads in local newspapers and magazines, the survey showed.

Instead of direct advertising, small businesses are investing in community networks through which they can promote their products and services, said Tim Rios, a senior vice president of community development at Wells Fargo.

"What we're seeing is that they're joining community organizations, like their local Chamber of Commerce, and making presentations there," Rios said. "It's a cheaper way to go, but also effective."

Community associations and trade groups are also proving to be a strong venue for business-to-business marketing, he added.

Beyond that, smaller businesses are also more likely to rely on an informal social network of hairdressers, plumbers, and neighbors for promotion, rather than hard-earned capital, according to Rebecca Macieira-Kaufman, the head of Wells Fargo's small-business division.

Of the owners that spent nothing on advertising in 2005, 62% said it wasn't appropriate for their type of business, and 16% said it was too costly, the survey showed.

Still, 49% reported paying to advertise on the Internet in past two years, while even more expected to in the years ahead, according to the survey.

In analyzing the data, San Francisco-based Wells Fargo called the Internet a "critical tool for small business" by mixing paid promotional campaigns with the word-of-mouth advertising through blogs, wikis, and online reviews, among other online features.

"Small-business people are getting more sophisticated online," Rios said, adding that a slew of services are now available to help design and maintain small-business websites.

The survey was part of the latest quarterly Wells Fargo/Gallup Small Business Index, which gauges owners' perceptions of revenue, cash flow, capital spending, and jobs, among other issues.