0 HubSpot Expands Its Services But Stays Focused on Small Business

Summary: HubSpot has continued to grow its customer base and expand its product. It's looking more like a conventional small-business marketing automation system every day.

You have to admire a company that defines a clear strategy and methodically executes it. HubSpot has always aimed to provide small businesses with one easy-to-use system for all their marketing needs. The company began with search engine optimization to attract traffic, and added landing pages, blogging, Web hosting, lead scoring, and Salesforce.com integration. Since my July 2009 review, HubSpot has further extended the system to include social media monitoring and sharing, limited list segmentation and simple drip marketing campaigns. It is now working on more robust outbound email, support for mobile Web pages, and APIs for outside developers to create add-on applications.

The extension into email is a particularly significant step for HubSpot, placing it in more direct competition with other small business marketing systems like Infusionsoft, OfficeAutoPilot and Genoo. Of course, this competition was always implicit – few small businesses would have purchased HubSpot plus one of those products. But HubSpot’s “inbound marketing” message was different enough that most buyers would have decided based on their marketing priorities (Web site or email?). As both sets of systems expand their scope, their features will overlap more and marketers will compare them directly.

Choices will be based on individual features and supporting services. In terms of features, HubSpot still offers unmatched search engine optimization and only Genoo shares its ability to host a complete Web site (as opposed to just landing pages and microsites). On the other hand, HubSpot’s lead scoring, email and nurture campaigns are quite limited compared with its competitors. Web analytics, social media and CRM integration seem roughly equivalent.

One distinct disadvantage is that most small business marketing automation systems offer their own low-cost alternative to Salesforce.com, while HubSpot does not. HubSpot’s Kirsten Knipp told me the company has no plans to add this, relying instead on easy integration with systems like SugarCRM and Zoho. But I wouldn’t be surprised if they changed their minds.

In general, though, HubSpot’s growth strategy seems to rely more on expanding services than features. This makes sense: like everyone else, they've recognized that most small businesses (and many not-so-small businesses) don’t know how to make good use of a marketing automation program. This makes support essential for both selling and retaining them as customers.

One aspect of service is consulting support. HubSpot offers three pricing tiers that add service as well as features at the levels increase. The highest tier, still a relatively modest $18,000 per year, includes a weekly telephone consultation.

The company has also set up new programs to help recruit and train marketing experts who can resell the product and/or use it to support their own clients. These programs include sales training, product training, and certification. They should both expand HubSpot’s sales and provide experts to help buyers that HubSpot sells directly.

So far, HubSpot’s strategy has been working quite nicely. The company has been growing at a steady pace, reaching 3,500 customers in October with 98% monthly retention. A couple hundred of these are at the highest pricing tier, with the others split about evenly between the $3,000 and $9,000 levels. This is still fewer clients than Infusionsoft, which had more than 6,000 clients as of late September. But it's probably more than any other marketing automation vendor and impressive by any standard.

0 Treehouse Interactive Refines Its Features and Targets Larger Firms

Summary: Treehouse Interactive has been slowly enhancing its marketing automation system with features that appeal to experienced users. Its new clients are larger firms and half are switching from another marketing automation product that they found inadequate. This might foreshadow attrition problems at other vendors.

It’s been nearly two years since my last review of Treehouse Interactive. Here's an update.

The big news is, well, that there’s no big news. Treehouse has been quietly but steadily growing its business (up 30% this year), improving its product, and attracting more demanding clients. One telling statistic is that about half its new customers are replacing an existing marketing automation system – a sure sign that Treehouse offers features that only an experienced marketer will realize are missing from other products.

A bit of background: Treehouse started in 1997 with the Sales View sales automation product. It added Marketing View marketing automation in 1999 and Reseller View partner management after that. Its marketing automation system offers the usual range of functions: email, Web analytics, landing pages, multi-step campaigns, lead scoring, CRM integration, ROI reporting. The greatest divergence from industry norms is Treehouse contacts always enter campaigns by completing a form. Other systems select campaign members with rules that can access a broader set of data.

In addition, Treehouse originally required all subsequent campaign steps to execute the same actions on the same schedule. This is considerably more rigid than the branching capabilities built into most marketing automation products. Treehouse has since enabled imported data to trigger campaign actions, and promises behavior-based triggers in the near future. See my original post for more details.

Treehouse’s developments since that post have largely played to its strengths. I’ll group these into themes, with the caveat that I’m combining enhancements introduced at different times in the past year and a half.

- form integration. Treehouse has continued to expand how clients can use its forms, which were already more powerful than most. The system can now generate HTML code to embed forms within external Web pages, allowing users to create standard Javascript or Facebook-compatible non-Javascript versions, or both. It can also post form responses using HTTP Send commands, which can send data to GoToWebinar (replacing GoToWebinar’s own registration forms) or to other systems such as product registration, CRM and customer support. The HTTP Send avoids API calls or Web Services, although Treehouse offers data exchange through Web Services as well. The system also has an “instant polling” feature to embed surveys within any Web page.

- CRM synchronization. When I last wrote about Treehouse, it had just added Salesforce.com integration. It has since added a connector for Oracle CRM On Demand. It has also improved its CRM integration to synchronize data in real time, show Treehouse events within the CRM interface, and allow salespeople to add leads to campaigns and remove them. CRM integration is handled through forms that map fields from one system to another. These forms also contain update rules (controlling when data from one system replaces data in the other) and action rules (specifying when to take actions such as sending an email or updating a list subscription). The action rules are particularly significant in the context of Treehouse’s forms-based campaign design, since they provide a way to modify lead treatments that isn’t based on the original form entries.

- Web analytics. The system now builds separate Web activity profiles for individuals (whether identified or anonymous, so long as they have a cookie), for all individuals associated with a company, and for companies identified via IP address but lacking an associated individual. An individual’s lead score can be based on both individual and company Web behaviors. The system has expanded its referral reporting to track results by the exact referring URL. The CRM integration can now capture the search phrase and other referral details for leads imported from Salesforce.com Web to Lead forms: this required special processing since Salesforce.com embeds the information within a text string.

- download and document management. Treehouse can now tie multiple downloads to a single request form. It can list the leads that downloaded a specific document (a feature Treehouse says is unique, although I can only confirm that it's rare), as well as counting total downloads and downloads by unique leads. Downloads are now part of contact history along with emails, campaigns, purchases, click-throughs and form actions. The system also maintains a library of available documents. These can be stored outside of Treehouse so long as there’s a tag for Treehouse to call them.

- social media integration. Marketing messages can include a button that lets recipients create social media messages with an embedded URL. The messages will be sent under the recipient’s own identity in systems including Facebook, MySpace, Twitter, LinkedIn and Digg. Although many demand generation vendors now offer some type of social sharing, Treehouse introduced this feature back in May 2009. Emails and forms can also include a forward-to-a-friend button that allows recipients to enter several email addresses at once.

- other advanced features. These include fine-grained access permissions, split and multivariate testing, easy addition of new tables linked to contact records, and support for non-Roman languages such as Chinese. All are features particularly relevant to larger or more sophisticated clients.

Treehouse pricing has changed a bit since my original post, now starting at $749 per month for up to 7,500 contacts in the database. This is still firmly in small business territory, although Treehouse’s advanced features really make it a better fit for more sophisticated marketers, who are usually at larger companies. The company is a particularly good fit for channel marketers who can benefit from its Reseller View system.

Treehouse now has nearly 200 total clients, of which more than half use Marketing View. This makes it one of the smaller players competing for mid-to-upper size clients, a particularly crowded niche. But the firm is self-funded and profitable, and it's selling on features, not cost. So I'd expect it to be a reliable vendor, even if someone else eventually dominates its segment.

0 Alterian Alchemy Knits Together Marketing Components

Summary: Alterian just announced Alchemy, which provides a new interface and tight integration across existing components.

Alterian last week announced a new generation of products called Alchemy. It’s positioning these as “customer engagement solutions” rather than “campaign management” solutions. The general idea seems to be that customer engagement involves digital dialogs while traditional campaign management is mostly about outbound messages.

Happily, there’s more here than new labels. The main changes, set for release next March, are:

- an integrated framework to share customer information and marketing data (campaign plans, contents, etc.) across channels. This is supported by a new capability to read data in Microsoft SQL Server databases without first loading it into Alterian’s own database engine.

- a new user interface built using the Microsoft Silverlight platform. This is highly configurable and includes specific new tools for building queries, campaigns, and dashboards. The campaign builder in particular has been updated to support trigger-driven, multi-step processes in a branching flow chart.

The company also plans to expand integration with KXEN for predictive analytics, although it hasn’t set a release date.

Alchemy will also include revised and expanded versions of Alterian's social media, Web content management, Web analytics, and email solutions. These will be released throughout the first half of next year. A detailed roadmap is available in the Alchemy FAQ.

Pricing for Alchemy hasn’t been announced, but it will be somewhat higher than current Alterian products. The old products will remain available to serve what Alterian now refers to as “traditional” marketers.

Alchemy is a bit tough to assess. It doesn't add many new functions, but Alterian already had an extremely broad set of capabilities. I think what’s really happening is it knits together products that Alterian had previously acquired but not truly integrated. This is delivering on an old promise, not creating a revolution. Still, it should let marketers do a substantially better job at managing customer relationships across all channels. Revolutionary or not, that's an improvement well worth having.

0 More on Marketo Financials: Despite Past Losses, Prospects Are Bright

Summary: Public data gives some insights into Marketo's financial history and prospects. Despite past losses, the company is in a strong position to continue to compete aggressively. (Note: as Marketo has commented below, this article is based on my own analysis and was written without access to Marketo's actual financial information.)

Here’s a bit more on this week's $25 million investment in Marketo: a piece in VentureWire quotes revenue for Markteo as $4.5 million for 2009 and "triple that" ($13.5 million) for 2010. This is the first time I've seen published revenue figures for the company. They allow for some interesting analysis.

Data I've collected over the years shows that Marketo had about 120 clients at the start of 2009, 325 at the start of 2010, and should end 2010 with about 800. Doing a bit of math, this yields average counts of 222 for 2009 and 562 for 2010, which in turn shows average revenue per client of $20,000 per year or $1,700 per month in 2009 and $24,000 or $2,000 per month in 2010. The table below throws in a reasonable guess for 2008 as well.

Given that Marketo’s list prices start at $2,000 per month for the smallest implementation of its full-featured edition, this is pretty firm evidence that the company has indeed been aggressively discounting its system – as competitors have long stated.

(Some competitors have also said that Marketo's reported client counts are cumulative new clients, without reductions for attrition. If so, the revenue per active client would actually be a bit higher than I've calculated here. But Marketo itself says the reported figures are indeed active clients and I've no basis to doubt them. The following analysis wouldn't change much either way.)

If you’ll accept a bit more speculation, we can even estimate the size of those discounts. That same VentureWire article quotes Marketo’s current headcount as 130 employees, compared with half that number at the start of the year. Assume there were 70 at the start of 2010 (which matches my own data) and will be 140 by year-end, for an average of 105. My records suggest that the headcount at the start of the 2009 was around 35, so the average headcount for that year was about 52.

Let’s assume a "normal" revenue of $200,000 per employee, which is about typical for software companies (and matches published figures for Marketo competitors Aprimo and Unica). That means Marketo revenues without discounting “should” have been about $10.4 million in 2009 and $21 million in 2010. Compared with actual revenues, this shows 2009 revenue was about 43% of the “normal” price ($4.5 million actual vs. $10.4 million expected) and 2010 revenue at about 64% ($13.5 million vs. $21 million).

So the good news for Marketo’s new investors is that Marketo has been discounting less (although there’s an alternative explanation that we’ll get to in a minute). The bad news is they have quite a way to go before they’re selling at full price.

We can use the same data to estimate Marketo’s burn rate. Costs are likely to be very close to the same $200,000 per employee (this includes everything, not just salary). My records suggest the company had about 25 average employees in 2008, for $5 million in expenses. Marketo was founded in late 2005, so let’s figure it averaged 10 employees during the previous two years, and that they cost only $150,000 because the early stage doesn’t involve marketing costs. This adds another $3 million. That gives a cumulative investment of $39.4 million.

We already know revenue for 2009 and 2010 will be about $18 million. The company started selling in late February 2008 and my records show it ended that year with 120 clients. Assume the equivalent of 50 annual clients at $15,000 and you get 2008 revenue of $750,000, for $18.75 million total. That leaves a gap of $20.65 million between life-to-date costs vs. revenues.
This nicely matches the “approximately $20 million” investment to date that Marketo CEO Phil Fernandez reportedin his own blog post on the new funding.

Now you can see why Marketo needed more money: its losses are actually growing despite having more customers and improved pricing. It lost nearly $16,000 for each new client last year ($7.5 million loss on 475 new clients). At that rate, even a modest increase in the number of new clients would have burned through nearly all of the company’s remaining $12 million within one year.

This isn’t just a matter of scale. It’s true that a start-up has to spread its fixed costs over a small number of clients, yielding a high cost per client during the early stages. Marketo shows this effect: the number of clients per employee has grown started at 3.4 at the end of 2008 and dropped to 5.7 at the end of 2010. This is the alternative to discounting as an explanation for those ratios of "normal" to actual revenue (remember: “normal” revenue based on number of employees).

But the client/employee ratio can’t improve indefinitely. Many costs are not fixed: staffing for customer support, marketing, sales and administrative functions will all increase as clients are added. To get some idea of Marketo's variable costs, compare the change in employees with the change in clients. This is improving more slowly:

And here’s the problem: at 1 new employee for every 6.8 clients, Marketo is adding $200,000 in cost for just $163,000 in revenue (=6.8 x $24,000 / client). It truly does lose money on each new customer. You can’t grow your way out of that.

So what happens now? Let’s assume Marketo gets a bit more efficient and the new clients to new employee ratio eventually tops out at a relatively optimistic 8. At a cost of $200,000 per employee, those clients have to generate $25,000 in revenue for Marketo just to cover the increased expense. This is just a bit higher than the current $24,000 per client, so it seems pretty doable. But it leaves the existing $7.5 million annual loss in place forever.

In other words, Marketo must substantially increase revenue per client to become profitable. (In theory, Marketo could also cut costs. But the main controllable cost is sales and marketing, and incremental cost per sale is likely to rise as the company enters new markets and faces stiffer competition while pushing for continued growth. So higher revenue is the only real option.)

Revenue per client can be increased through higher prices, new products, and/or bigger clients. Pricing will be constrained by competition, although Marketo could probably discount a bit less. This leaves new products and bigger clients. Those are exactly the areas that Marketo is now pursuing through add-ons such as Revenue Cycle Analytics and Sales Insight, and enhancements for large companies in its Enterprise Edition. So, in my humble opinion, they're doing exactly the right things.

Some back-of-envelope calculations confirm that revenue per client is by far the most important variable in Marketo’s financial future. The following tables use some reasonable assumptions about growth in clients and clients per employee; take my word for it that the results don’t change much if you modify these. But results change hugely depending on what happens to revenue per client: losses continue indefinitely if it remains at the current $24,000 per year; they continue for two years and total $10 million if it increases at 10% per year; and they end after one year and $4.4 million if it grows at 20% per year. Bear in mind that revenue per customer did grow 20% from 2009 to 2010 ($20,000 to $24,000). So I’d expect it to continue rising sharply as Marketo firms up its pricing and starts acquiring larger clients.


Indeed, these figures raise the unexpected (to me) question of whether $25 million in funding is more than Marketo will need. I’d guess the company’s management and current investors were careful not to dilute their equity any more than necessary, so I think they’re planning some heavy investments that are not factored into my assumptions. In fact, the company has said as much: the VentureWire piece quotes Fernandez as stating the new funds will be used for additional sales and marketing staff, to open offices abroad, to integrate with other vendors and launch vertical services in sectors like health care and financial services.

I also expect continued aggressive pricing (perhaps more selectively than in the past) and maybe some acquisitions. It's possible that Marketo will also expand its own professional services staff, since clients definitely need help with adoption. But that would conflict with its existing channel partners so it would need to move carefully.

What does it all mean? Here are my conclusions:

- Marketo's losses reflect a conscious strategy to grow quickly through aggressive pricing. There is no fundamental problem with its cost structure: company could be profitable fairly quickly if it decided to slow down and raise prices.

- Marketo's future lies in the middle and upper tiers of the market. Its pressing financial need is to raise revenue per client, which will lead it away from the low-cost, bitterly competitive market serving very small businesses.

- The new funding will support an expanded marketing and product push. Competing with Marketo in its target segments is going to be a challenge indeed.

0 LoopFuse Captures More Web Traffic Data

Summary: LoopFuse has extended its system to capture more Web traffic data, which lays the foundation for future analytics.

LoopFuse recently released its latest enhancements, which it somewhat grandiosely labels as making it “the First and Only Marketing Automation Solution with Inbound Marketing”. In fact, as the subhead to their press release states, what they’ve really done is somewhat more modest: add “real-time Web traffic intelligence” by providing features to capture search terms, referring sites and page views, and link these to individual visitors.

The new release also adds real-time social media monitoring (directly for Twitter and Facebook, and through Collecta for blogs, YouTube and other sources).

These features are certainly useful. But my idea of "inbound marketing" is more along the lines of HubSpot, which provides search engine optimization, paid search campaign management, social media monitoring and posting, blogging, and Web content management. Although LoopFuse might eventually add those functions, it hasn't yet and isn’t necessarily moving in that direction.

Accepting their labels for the moment, let’s look at what LoopFuse has added:

- “content marketing” is a set of reports that tracks Web traffic related to different assets. Users get a list of the assets ranked by number of page views. They can then drill into each item to see a graph of traffic over time and to see details such as the number of visitors, views per visitor, and referring domains and pages. Because the views are tied to individual visitors, users can also click on the referring domain to see what other pages people from that domain visited. This is essentially the same information as provided by...

- “inbound marketing”, which shows visitor sources by category (direct links, paid search ads, organic search) and details within each category (specific messages, ads or keywords). As just noted, users can drill down to see which Web pages were viewed by visitors from each source.

- “social monitoring” provides real-time monitoring of user-selected terms on the various social Web sites. Unlike the other Web traffic data, this information isn’t stored within the LoopFuse database and isn't tied to specific individuals. LoopFuse plans to provide some trending reports in the future. Of course, the real trick would be linking social media comments to lead profiles.

All of these are valuable reports. Having them within a single system is particularly helpful for the small businesses targeted by LoopFuse, where all channels are likely to be handled by a small department and possibly the same individual. Otherwise, the users would need switch among several systems to do their job. In larger firms, where different people would be responsible for different channels, each channel can be managed by a separate system without requiring anyone to use multiple products.

Saving effort is nice, but the real value of a unified marketing database is being able to coordinate marketing messages and relate all marketing contacts to sales results. LoopFuse hasn’t publicly revealed its approach to marketing performance measurement but definitely has something in the works. I’m particularly hoping they'll use the detailed behavior information to relate outcomes to specific marketing messages, rather than just looking at movement through purchase stages. Although stage data by itself can project future revenues, it must be tied to specific marketing programs to measure those programs’ value.

In case you’re wondering, LoopFuse is storing the new Web traffic data in denormalized tables that are separate from the operational marketing database. This enables much quicker response to ad hoc queries and, should eventually support the time-based views needed for trends and stage analytics.

For those of you keeping score at home, LoopFuse’s Roy Russo also told me that the company stores each client’s data in a separate database instance. Russo said this has proven more scalable and cheaper than the textbook Software-as-a-Service approach of commingling several clients’ data in a single instance. So far as I know, most (but not all) marketing automation vendors use same approach as LoopFuse.

Russo also said that all data in the system is accessible via standard API calls, something that’s also not always possible with competitive products. In fact, Russo said LoopFuse’s entire interface is built on using the published API, which means that technically competent clients could build alternative interfaces to embed LoopFuse data and functions within other systems. If nothing else, this gets them Geek Style Points.

Of course, no discussion of LoopFuse is complete without mentioning its freemium offer, launched last June amid considerable controversy. The company says that nearly 1,000 accounts have now signed up for this, which is impressive by any standard. No news yet on how many have converted to paid.

One side effect that I hadn't anticipated – although LoopFuse apparently did – is that agencies and consultants use the freemium to service new clients, who convert to paid when their volumes grow. This gives LoopFuse an edge in the competition for channel partners. The value of that edge is a bit uncertain, though, since an increasing number of service firms – including Pedowitz Group, Annuitas and LeftBrain Marketing – are now working with multiple marketing automation vendors.