If imitation is the sincerest form of flattery, the folks at craigslist must be feeling pretty flattered lately.

zixxo.jpgNewcomers are charging into the business of online classified ads with a vengeance, each promising to improve upon the simple and free ad model that is making craigslist a household name.

We wrote about LiveDeal in December. Now comes ZiXXo, a new start-up out of Belmont. Officially launched last week, the site offers free classified ads in more than 100 markets, including the San Francisco Bay Area.

Most new classified ads sites face a daunting chicken-and-egg challenge. Sellers are reluctant to post ads on a new site that hasn’t built a base of users yet, and users won’t go to a Web site where no one is selling anything.

Even after building a strong base of users, the owners of free classified ads sites have to figure out to make money. (Craigslist makes virtually all its money off jobs listings.)

For ZiXXo’s Chief Executive Mike Hogan, the answer is coupons.

For less than $300 a year, local merchants can create online coupons that will appear in a special section above or below the free ads on ZiXXo. Users print out the coupons and redeem them. Hogan and his staff have devised a coupon-wizard system that he says makes it easy for merchants to create online coupons in minutes. Merchants can change the coupons whenever they want.

“Seventy-nine percent of the U.S. population uses coupons,” says Hogan. “”But on the Internet, it’s much better than clipping and saving. If we can use classified ads to build local communities, then we can capitalize on the coupons.”

That leads us to Hogan’s next challenge: luring local merchants to buy into the online coupon program.

Experts view local businesses as a huge, untapped market for online advertising, potentially worth billions of dollars.

But many local businesses do not have Web sites, and still pour their advertising dollars into printed phone books and newspapers. Online companies from Google and Yahoo on down have been grappling with how to educate merchants about online advertising opportunities.

Hogan is banking on building a cadre of commission sales people to beat the streets and sell the ZiXXo program to merchants door-to-door.

He has created what he calls a “franchise in a box” kit that they can use to market the program to merchants.

“What we’re looking for is entrepreneurial types who want to create a new Internet business for themselves,” he said.

Hogan is a valley veteran. He worked at Novell for a time and was vice president of business development for Poet Software for five years. He has not taken any venture capital funding for Zixxo. As he said, “It doesn’t take a lot of money to start up a company like this.”