Yesterday's News: Marketo Plans IPO, Eloqua Eyes B2C

There were two bits of news from Marketing Automation Land yesterday: Marketo announced it has filed a draft registration statement for an initial public offering, and Eloqua CEO Joe Payne was quoted as saying his company plans to expand into business-to-consumer marketing.

The Marketo news is long-expected. CEO Phil Fernandez said last September that the company planned an IPO for first half of 2013, so they are pretty much on schedule. Of course, it’s still possible that someone would purchase the company instead, but the asking price is probably too high, and the prospect of an IPO just made it higher. No word on timing of the actual filing. Hopefully this means we soon get to see a filing statement with lots of juicy financial details…my mouth is already watering.

I have little doubt that Marketo can manage a successful IPO.  But it's less clear it can survive long-term as an independent company.  Previous marketing automation leaders including Eloqua, Unica, and Aprimo all ended up as part of larger organizations.  The fundamental reason is that marketing is ever-more-closely related to other business activities, as companies strive to provide an integrated customer experience.  Clients prefer to buy complete, integrated suites for all customer-management functions.  They good news for marketing automation vendors is that they can plug a gap that many big vendors need to fill.

This makes Eloqua's plan to pursue B2C marketers even more interesting.  Perhaps it they aren't really plans -- it was just a comment in a phone call, which I didn't hear myself.  But my immediate reaction is that Oracle already has a B2C marketing system, cleverly called Oracle Marketing and derived from its Siebel acquisition.  I've never heard an enthusiastic comment about the system, but as I recall from the last time I looked at it -- many years ago -- it was reasonably capable.  The only reason I can see for Oracle to use Eloqua as a B2C product is that Eloqua is a true SaaS offering, while Siebel was originally engineered for on-premise deployment and is still largely oriented that way.

This is pretty much consistent with a presentation last week by Oracle CEO Mark Hurd, along with Payne and Oracle EVP for Product Development Thomas Kuria. They set out a broad vision of customer experience management that included content management, social relationships, marketing, e-commerce, sales, and customer service, with Eloqua as the marketing component.
 

I wholly agree with the theory.  As I wrote recently in Why is B2B Marketing Automation Growing So Slowly?, today's marketing automation manages just one slice of the customer life cycle, and indeed just one slice of the acquisition cycle. Marketers need a broader system that itself fits into a larger puzzle. Oracle’s presentation showed they understand this quite clearly, and see exactly how Eloqua contributes to a solution. In this context, using Eloqua for B2C makes sense, since there’s no distinction between a B2B marketing cloud and B2C marketing cloud.


But the real world is more complicated than the picture suggests. B2B and B2C marketers have different requirements. Eloqua is more flexible than most B2B marketing automation systems but still can't match a good B2C system. The biggest issue is data structure: Eloqua is built around a standard model based on CRM systems.  It does let users add auxiliary tables but even those are subject to some constraints. A true B2C system can accommodate any data model. There are also issues of scalability and of specialized needs such as programs with hundreds or thousands of segments. It’s hard to imagine Eloqua competing in the top tier of B2C. It might be able to support mid-size B2C systems, but that doesn’t seem to be Oracle’s intent.

Oracle’s diagram might make  you think they have actually addressed this issue by replacing Eloqua’s own database with a “customer experience foundation” that includes data management and integration, along with automation, decisioning, collaboration, and business intelligence. That would be really great: one database to serve all the customer experience business functions, including marketing. But, alas, that’s not how Oracle does it. Each component of its customer experience cloud is a separate software application, many of which were purchased. Oracle does some data synchronization and sharing of certain functions, but that’s it.

So we're back to where we started: with an essentially separate Eloqua that is is engineered for B2B marketing automation.  Oracle has the money and engineering talent to rebuild Eloqua to meet B2C needs, but their track record for enhancing acquired products isn't good.  If Oracle wants a serious B2C cloud marketing product, it will probably need to buy something else.

HubSpot Reports 82% Revenue Growth

HubSpot released its 2012 Year in Review today, reporting 82% revenue growth, to $52.5 million.  Number of clients grew by 42%, to 8,440.   The figures are in line with my expectations, so they don't require any adjustments to my previous estimates of industry size or growth rate. 

Compared with last year, the revenue growth rate is about the same (82% vs 85%), while the customer growth rate is sharply lower (42% vs. 55%).  That means revenue per customer grew by significantly, by 24%. This reflects HubSpot's aggressive moves to serve larger companies and provide expanded features for traditional marketing automation such as more robust email and lead nurturing.  The revenue per customer suggest that things are going according to plan.

Congratulations to the team at HubSpot, and special appreciation to them for openly sharing information that many other companies do not.  I believe such transparency builds greater confidence in the company, as well as providing a clearer picture of the industry as a whole.

Here are figures and growth rates for the past three years, as listed in the report.  Note that I calculate revenue per customer based on the average customer count for each year. 

VisualIQ Connects Attribution to Media Buys

As I threatened – I mean, promised – a couple of weeks ago, I’ll be writing about marketing measurement systems over the next month or two. The hottest topic within this segment is probably algorithmic attribution, which uses advanced statistics to calculate the incremental impact of each marketing contact on final results. Unlike marketing mix models, which work with aggregated data such as total TV spend per month, the algorithmic systems start with individual ad impressions. The systems build a history of impressions for each person, identify groups of people with similar histories, and then attribute different results to differences in those histories. For example, there might be two groups of people, one having received three impressions and the other having received the same three plus a fourth. Any difference in outcomes would be attributed to that fourth impression. The actual details are more complicated, but you get the idea.

The advantage of algorithmic attribution is it is based on actual data, rather than arbitrary fractional weights based on someone’s opinion. (I wrote a more detailed critique of fractional attribution back in 2010;  I’m pleased to see that algorithmic attribution has become more common since then.) It goes without saying that algorithmic attribution makes more sense than assigning all value to either the first or last marketing touch.

VisualIQ was one of the pioneers of algorithmic attribution, dating back to its founding as Connexion.a in 2005. The company has grown rapidly in recent years. This reflects both greater market interest and, perhaps even more important, expansion of the product to connect directly with ad buying platforms. This makes it easier to convert the system’s findings into profitable marketing results.

Like other attribution systems, VisualIQ must start by assembling data about the client's advertising programs. The system gathers individual level data either by embedding its own pixel in Web ads, emails, and landing pages, or by importing impression history from other sources. It can stitch together impressions from several different sources to create a unified individual history. It can also import non-individual-level data, such as TV spend, weather, and competitive conditions.

The system can use this data to build two different types of models.

The IQ Envoy module builds “top down” models based on aggregate data; these are similar to traditional marketing mix models but also show the impact of one channel on another (for example, the effect of TV ads on direct mail response). This lets the system estimate the true net contribution to final results of spending in each channel.

Top down models are fairly customized, but Visual IQ has streamlined its process so it can build a new one in six to eight weeks, which is quick for a mix model. and make regular updates. Once the model is built, marketers can easily see the impact of different budget allocations by moving on-screen sliders. Constraints built into the model prevent users from creating scenarios that are unrealistic.

The IQ Sage module builds “bottoms up” models, which use individual-level data. Users can include real-world constraints such as minimum or maximum spend by channel and diminishing returns from higher spending levels. Once the parameters are set, the system generates a graph showing the best possible results for each spending level. Users can pick the level they prefer and have the system generate an optimal media plan. This can be exported to Excel for manual refinement. Or, users can send the plan directly to real time bidding platforms and online ad exchanges for automated execution.

VisualIQ has two additional modules. Insight IQ allows users to explore the data loaded into the system.  This is important because marketers may have never seen it all loaded and correlated. Audience IQ shows the demographics of best customers and results for different segments.

As you might imagine, algorithmic attribution needs a large volume of data to build an effective model. VisualIQ has found that clients need an ad budget of at least $5 million per year. Those companies typically gain a 15 to 20% increase in media efficiency.

Cost for VisualIQ depends on the modules used, data volume, number of channels and other variables. Pricing for a system including IQ Sage and IQ Envoy starts around $150,000 per year.

Why Is B2B Marketing Automation Growing So Slowly?

Let me start by saying that the 50% revenue increase I’m projecting for B2B marketing automation in 2013 is a very healthy one. In actual dollars, the $250 million gain is much larger than the $175 million growth in 2012. So if you’re working in the industry, don’t circulate that resume just yet.

But still, as I noted last week, the growth rate is slowing – and for some vendors seems to have fallen considerably in the second half of 2012. The most notable is Eloqua, which as a public company has to report its results. Its year-on-year revenue was up 42% in first half of 2012 ($45 million vs. $31.7 million) but just 28% in the second half ($50.7 million vs. 39.6 million). That means even the absolute increase was down: $11.2 million vs. $13.3 million. Figures for other vendors are not publicly available but I've seen hints that several have slowed as well.

What really got me thinking about this was prepping for a Webinar I’ll be giving next Wednesday on the future of marketing automation (register here). I had figured to start off with my industry growth figures, but this led naturally to a question about long-term potential, which in turn leads to thoughts of market penetration rates.

We’ve recently been seeing surveys that suggest something close to 50% adoption of marketing automation.  For example, LoopFuse reported 42% of respondents had marketing automation in place, a Forrester study reported 45% use among B2B enterprise marketers, and the Lenskold Group found 70% marketing automation usage.*

If true, these figures would actually be bad news for marketing automation vendors.  They suggest the market is at least half way to saturation, after which growth would slow dramatically.

But most people in the industry are confident the potential is much larger than double the current market. The raw numbers suggest as much: according to data compiler Manta.com, there are nearly 1 million U.S. companies with $5 million or more revenue.** Of these, about 300,00 fall into B2B categories. Raab Associates' VEST report shows about 20,000 B2B marketing automation systems at those companies, yielding about 6% penetration. Not surprisingly, the rate is higher among larger firms.  I’ve excluded business under $5 million revenue from this analysis because that’s a very different market.

What accounts for the discrepancy between actual data and survey results? One answer is that people who answer surveys about marketing automation are disproportionately likely to be users.  So the untapped market is indeed much larger than surveys would suggest.

But here’s another, less comforting explanation. It’s a safe bet that at least half of current marketing automation users are in tech industries – call that 10,000 of the total. The Manta figures show 21,000 companies in the tech categories – computer hardware and software, ecommerce and IT outsourcing, electronics, and information technology. I know you can do this one in your head, but 10,000 clients among 21,000 companies means the tech sector is just under 50% penetrated.  This is pretty much what the surveys are telling us. And, yes, survey respondents do tend to be concentrated among tech companies.

Why is this worrisome?  Well, it suggests is that most B2B marketing automation growth is coming from mid-to-late adopters within the tech industry, not early adopters across a much larger universe.  That’s scary because everyone has expected a huge take-off when marketing automation finally transitions beyond the early stages of market development.  If the transition has already happened in tech and never gets started anywhere else, we'll never see that hyper growth.Quite the opposite: the tech pool will run dry in a year or two and growth will slow to a modest replacement rate.

A more tactical consideration is that  mid-to-late buyers have different purchasing styles (more risk averse, more support oriented, more price sensitive, more brand driven) than early adopters. There’s some evidence that B2B marketing automation vendors are moving their sales and marketing in this direction. This makes it even harder for them to sell to pioneers in other industries, who need the original missionary approach.

If you want another hint that the sky may be falling, how about this: a recent Econsultancy survey found that marketing automation is now lower priority among marketers than a year ago (top three for 11% vs. 15%). Since priority presumably translates to purchase intent, that seems to foreshadow a decline in new sales. I don’t want to make too much of this – the survey was among UK marketers and it also showed a sharp increase marketers who ranked marketing automation among their most exciting digital opportunities. Econsultancy’s explanation for the apparent contradiction was that most marketers already own a marketing automation system, so now they’re turning to exploiting it.  But while that's comforting on some levels, it still suggests lower future sales.

To be honest, I was less concerned about the year-to-year change in percentages than about marketing automation’s low rank in both years – next-to-last in 2012 and ninth of twelve in 2013. An IDC report from 2012 had similar results, ranking marketing automation seventh on a list of nine.

I have my own little theory about the low priority, which boils down to the fact that marketing automation only handles a fraction of marketers’ total activities.  Specifically, it supports email and online events, which a 2011 MarketingSherpa study found account for just 20% of program spending.  Even with direct mail and marketing automation itself, the total reaches only 37%. My theory is that marketing automation has a low priority because it is far from a complete customer management solution – or even a complete customer acquisition system.

There are other signs of early market maturity within my VEST data. One is greater concentration among the industry leaders.  My primary measure is employee counts, which are revealed by more vendors than revenue.  Last year, the top four industry vendors (Eloqua, Marketo, HubSpot, and Infusionsoft) added 49% more employees, compared with just 21% for the rest of the industry.  My revenue estimates show a similar gap although it's less pronounced. Revenue per employee is also about 20% higher for the top four vendors than all others combined; this is a sign of tight margins at smaller vendors, which make it hard for many to survive without outside funding. (That gap has actually shrunk since last year.)  Most tellingly, the past year hasn’t seen the rise of any fast-growing new challengers, in the way that Act-On and Pardot appeared in earlier years. This is yet another of industry stability and, perhaps, nascent consolidation.

So, is B2B marketing automation doomed to be no more than a niche application for tech marketers? Industry optimists would argue no, and point out that if half the clients are in tech, then the other half are not. Point taken. But it would be Panglossian to assume that other industries are simply waiting their turn to adopt marketing automation once the tech industry is saturated. In reality, I constantly discover new (to me) marketing automation products tailored to specific industries such as insurance, real estate, franchises, dentists, local retailers, and so on. I suspect the real reason the B2B marketing automation vendors haven’t had much success entering those territories is that they’re already occupied.

If that’s so, then the industry verticalization I’ve long expected has already happened and general purpose marketing automation vendors will have a much harder time than expected in selling to marketers outside of tech. As I suggested above, they’ll need a much more compelling story than one that leaves them at the bottom of priority lists even for tech marketers. Specifically, they’ll have to expand their scope to incorporate all marketing activities: a 20% solution just won’t be enough.
__________________________________________________________________

* Of course, the minute I posted this blog, I started to see additional figures.  A ClickZ article quoted 25% use by 38 B2B companies within the Fortune 500.  An Aberdeen study reported 30% adoption.  A BuyerZone survey returned 13% usage, although it probably included mostly small businesses. 

** Here's the Manta data if you want to play along at home.

And Our Forecast of B2B Marketing Automation Revenue for 2013 is....

I’ve just finished the latest update of our B2B Marketing Automation Vendor Selection Tool (VEST), available on the raabguide.com Web site. The VEST is our evaluation of industry vendors, aimed primarily at companies choosing a marketing automation system.

The VEST contains a great deal of information that provides interesting (to me, at least) insights into industry trends. But by far the most quoted piece of content is our estimate of industry size, which we put at $525 million for 2012. I’ll get to the 2013 estimate in a bit.

First, I thought I’d explain where the figures come from. We use two methods:

• Vendor revenues. This starts with revenue figures provided by major vendors, supplemented with estimates for the smaller ones. The estimates are based on client counts and estimated revenue per client, and cross-checked with estimates using employee counts and estimated revenue per employee. 

• Sector revenues: We aggregate the vendor-provided client counts by industry segment (micro business, small business, mid-size business, and large business), which we multiply by the estimated average selling price in each segment.

Both methods give similar results.

If you’ll pardon a bit of whining, I’ll point out that the estimates are getting harder to build because several vendors no longer provide much information. Some are now part of public companies, which don’t break out revenue or clients for a particular product. Others are still privately held but have stopped releasing precise figures for competitive reasons or to help manage expectations. I can only say this makes me doubly appreciate the vendors who do provide firm data.

Anyway, back to the estimates. Information dribbling in over the past few months has shown a downward trend: Eloqua reported its income for the 2013 would be up 34%, compared with 39% growth the year before;  figures released when ExactTarget bought Pardot suggested Pardot’s 2012 revenue would grow no more than 50%, compared with more than 100% in 2011; Neolane just yesterday reported 40% growth in 2012 vs. 47% the year before.  Only Infusionsoft kept up its 50% rate in both years. Of the other major vendors, Marketo and HubSpot have both been quiet recently.

All told, then, I was expecting the industry growth rate to fall compared with last year’s estimated 62%, which itself was probably a bit high.  Let's say the 2012 base was really $500 million, which gives a 54% growth over 2011.

When I finally assembled the new VEST data, things did indeed look a bit slower.  I won’t go into the gruesome details of my adjustments for incomplete information. But the result was that sector estimates showed a six month growth of 22% in total clients and 26% in revenue run rate. The revenue figure is more meaningful because it adjusts for the size of clients, which the raw client count does not. Doubling that to a twelve-month rate would yield expectation of 52% revenue increase.  That seemed about right, and better than I had feared.

My estimates for the major firms also came up with 52% revenue growth for 2013.  I'll be tad conservative and go with 50%. How scientific can you get?

Bottom line, then: Raab Associates official estimate of B2B marketing automation vendor revenues for 2013 is 50% growth from $500 million in 2012, which yields $750 million.

(Note: this is an updated version of the original post.  Some details have changed slightly but the forecast remains the same.)

The Marketing Funnel is Dead: Here's What Will Replace It

Okay, I freely admit that headlines like “the marketing funnel is dead” are a cheap trick to attract attention.
But I swear I came by this one honestly. Too tired to do any serious work on a recent plane flight, I scanned a random white paper that argued the traditional idea of a funnel didn’t capture the need to treat customers individually as they move towards a purchase. So far my head was nodding in agreement plus maybe a little drowsiness. But then came the punch line: instead of a funnel, marketers should think of managing each customer’s progress as a process, which is best represented – wait for it – as an escalator.

Now I was fully awake, and not in a good way. How is an escalator any less linear than a funnel? Have I missed some crazy new form of multi-path escalator networks? Maybe so: I don’t get out much, and who knows what these kids today are up to? But assuming that’s the not case – and I do after all read Twitter – the escalator analogy is no better than a funnel at illustrating today’s situation.

Nor, to be a bit more serious, is the concept of managing buyers as a process. It’s true that a process can have branches (although not the escalator-like linear process this paper described). But a process is still something the marketer controls. Whereas, the dominant fact of marketing today is precisely that marketers don’t have control: the buyer does. It’s the buyer who decides at every step what she’ll do next.

The picture that comes to my own mind is a tornado: a totally uncontrollable, unpredictable force that leaps across the landscape setting down wherever it wants. By this analogy, the best a marketer can do is to build storm-proof structures that will function successfully no matter what buyer does. I don’t think that’s quite the right image – after all, buyers are not destructive – but it does convey the frightening powerlessness of marketers in today’s world.

The better analogy is probably a maze. Marketers can build an environment that defines the options available to buyers, even though the buyers still make their own decisions about the path they take. The maze also shows how buyers can follow different paths and still end up at the goal, can go in circles indefinitely, and can exit without reaching the goal. It also implies correctly that the marketer’s skill determines quality and effectiveness of the buyer experience, just as the maze designer’s skill determines how much fun it is for visitors. If you really want to push the analogy, you can argue that we’re talking here about a corn maze – because ultimately customers can break out of the predefined paths if they want to.

I guess we’re all lucky that my flight didn’t last much longer, since I was beginning to think about how corn needs water (funding?) and if there’s a drought the ears of corn will have small kernels (customer value?). A more useful insight is that mazes have different regions, so the maze analogy replaces the notion of sequential lead stages with a more nuanced view of non-linear buyer states that can be the same distance to the goal yet differ in other significant ways. Buyers can also jump from state to state without necessarily moving through regions that are adjacent – like a tornado touching several spots within a maze, come to think of it. But enough with the metaphors.

Let’s just stick with the main point: the marketing funnel is really and sincerely dead. The purchase process is no longer linear and, even if it were, marketers couldn’t control how buyers move through it. The image of maze may not be perfect but it does show that buyers can follow many routes, that they’ll make their own choices, and that marketers still play an important role by defining the buyers’ environment. At least it’s a start.

Of one thing I’m certain: the buying process is not an escalator.