Over the past ten years, marketing and ad tech has been an exciting sector to watch. We have seen a steady stream of innovation and market dynamics, and the sector has been a powerful growth enabler for B2C and B2B businesses. Over time, innovation in the category has moved closer to the customer with emphasis on personalization and customer experience across the full spectrum of marketing services. This ranges from ad tech to CRM, to site optimization, to mobile, and even to in-store. As the digital marketing space continues to develop, we are seeing a confluence of factors that are aligning as enablers for a new wave of growth among those marketing services companies focused on the small business market and we are seeing a new set of companies emerging as early leaders in this category.
The Market Opportunity
The opportunity exists for a new generation of high-growth players, in part because current marketing automation offerings are not positioned to support small businesses. Established players such as Marketo, HubSpot, and even SalesForce are too cumbersome and expensive for most small businesses to afford. Yet these players have helped establish the standard for services that can now be delivered as light-weight, self-service offerings for small and mid-size businesses (SMBs). Cloud infrastructure offerings, such as AWS, have enabled new market entrants and helped facilitate product delivery. According to the Small Business Administration, there are close to 30 million small businesses in the United States that account for more than 50% of domestic sales. In contrast, there are only about 120,000 firms with more than 500 employees. The market opportunity for SMBs is extremely large and the sales process can be much simpler than it is for enterprise accounts.
Having now matured, the first wave of small business-oriented marketing services companies has helped to build a digitally savvy army of small business marketers. MailChimp alone claims to have more than 12 million users. Companies like VistaPrint, Constant Contact, Go Daddy, and Wix have all leveraged the rapid growth potential and attractive SaaS economics that can be achieved in the SMB market to build strong public companies. These companies grew up delivering basic marketing services such as email, customized marketing collateral, domain name and hosting services. The next wave of growth will create a new set of services and companies that enable small businesses to cost effectively achieve increased marketing sophistication and marketing reach.
Factors Influencing Strong Growth Potential
There are a number of factors that can present an attractive business model for SMB-focused marketing automation and ad tech companies. In particular, the sales and delivery characteristics are helping companies in this category to achieve strong SaaS metrics. The cost to acquire can be low, relying heavily on self-service for sales and product delivery. The sales cycle does not get bogged down in large company procurement requirements. And, low support and professional services requirements can lead to high margins, even for software.
Because of these factors, we are seeing companies achieving profitability early and even during periods of high growth. These factors also contribute to the ability to scale fast: the sales and product delivery models that have been proven out in this market can allow for rapid growth when product/market fit is right. Many players are offering niche services and the sector will likely see active consolidation as services begin to mature.
Who’s Positioned to Win?
A number of companies are off to impressive starts in delivering next-generation marketing services to small businesses. Leadpages, a Minnesota company currently focused on landing page creation, testing, and optimization, has rapidly acquired over 40,000 customers and will be one to watch. In the CRM/sales-enablement category, things are looking crowded with companies like Insightly, Pipedrive, Zoho, and others trying to find the right balance between features, simplicity, and price.
One potential inhibitor to growth in marketing services for SMB is the lack of integration across point solutions to enable centralized automation, control, and analytics. This speaks to the need for an Integration Platform as a Service (iPaaS) offering, which we expect to emerge non-organically as the sector matures. Right now companies rely on middleware, such as Zapier, to deliver integrated campaigns. Despite the minimalist nature of the Zapier offering, it is widely used to manage flows within federated marketing environments. Companies such as Built.io and IFTTT are also looking to be the cloverleaf in the digital ecosystem, but these services do not offer friendly enough connectors to thrive in the tech lean SMB space.
We believe the emergence of an iPaaS offering will be a critical growth enabler for this sector. Without simple centralized control, small businesses will not have the skills or cycles to manage a federated marketing environment. Though several companies appear positioned to step into this void, we are not currently seeing any leaders. The existing model relies on certified integrations and most vendors tout the complimentary products that they support. Site platforms like Wix and Shopify are well positioned to fill this gap with better integrated marketing services that do not require IT. Similarly, marketing and product savvy LeadPages positions itself as an integrated marketing hub through its soon-to-be released Center product, and API integration platform Cloud Element is filling this gap with one-to-many hubs that can radically simplify cross-vendor integrations. Zapier, Built, and others have the potential to do the same. Additionally, be on the lookout for Shopify, Square, Wix, and other site platforms to become more acquisitive around marketing tools. We also cannot count out WordPress with over 60 million sites running. On the one hand, the open nature of the WordPress environment may inhibit the development of the type of seamless marketing support that could serve small business at scale. Yet we find the acquisition of Woo Commerce, which runs on about 30% of active e-commerce sites, by Automatic, the operator of wordpress.com, certainly noteworthy.
It is early days for the next generation of SMB-focused marketing services, but the market and business model characteristics suggest that this will be a fun category to watch.
[This article was contributed by James Keller, Executive Partner]