0 Raab Report: Financial Comparison of B2B Marketing Automation Vendors

I’ve been so busy analyzing the new VEST data that I missed the announcement that Eloqua’s would make its initial stock offering today. The valuation was a bit disappointing – $368 million, or just over four times revenue trailing 12-month revenue – but certainly a good return on its backers’ investment of about $41 million. And the stock did rise 12% on the first day. Good for them, and congratulations.

Coincidentally, I was already planning to write today about industry financials. I’ve been creeping in that direction with the previous two posts about revenues, growth rates, and market share. Now let’s plunge in with some more substantial analysis.

For companies like Eloqua and its competitors, there are really two big financial questions: how fast can they grow, and how can they become profitable? In a young industry like B2B marketing automation, the primary focus is growth, and I published some figures on that yesterday  (repeated below). As we saw, Eloqua’s client count is growing considerably slower* than all major competitors except Infusionsoft. This may be one reason the stock market gave it a relatively conservative valuation.

Revenue figures tell a similar story, as does revenue per client. We looked at those in Tuesday’s post;  I’ll repeat the caveat that figures for Eloqua and HubSpot are my own estimates based largely on client growth and (for HubSpot) changes in client mix. The standout performer in all these tables is Marketo, but bear in mind that they’ve also taken much more investment than any of the others ($107.5 million) and the $70 million in 2012 revenue hasn’t happened yet. Still, this suggests that Marketo might be able to fetch a higher price than Eloqua.

What about profitability? I’ll repeat that the financial markets care much less about profits than growth for early stage companies. Still, profits will have to matter eventually.  So they're worth a look.

Eloqua is the only company in this group with published financial statements, so any profitability analysis has to be speculative. One useful measure is employee counts, which are a reasonable proxy for expenses and operating efficiency. The table below presents clients, employees, and clients-per-employee ratios.

The first thing you’ll notice is the broad range in clients-per-employee ratios: from 40:1 for Infusionsoft to less than 4:1 for Eloqua. The main reason is the size of each company’s clients – Infusionsoft serves small businesses that take much less effort per client than the mid-size and large companies who buy Eloqua.

Still, Marketo, Pardot, SalesFusion and Net-Results all serve primarily mid-size companies, so they are somewhat comparable. (Act-On tends a bit smaller.) Given that assumption, the figures suggest that Pardot, Net-Results and SalesFusion are more efficient than the others. That’s probably true, perhaps because they are all self-funded. Net-Results also markets primarily through resellers, which also lowers its costs.  Act-On’s ratio is notably low, probably reflecting aggressive staffing as it prepares for rapid growth.

The second thing you’ll notice is the year-on-year trend. Infusionsoft, HubSpot, Act-On, and Net-Results all show a drop in the clients-per-employee ratio since last year, meaning they have become less efficient. We can probably attribute that to gearing up for growth. By contrast, Eloqua, Pardot and SalesFusion have become substantially more efficient. Eloqua’s gain is particularly impressive since it has the largest client base and relatively low growth – suggesting the company has been working hard to keep costs down in preparation for its public offering. It looks like Marketo has become just slightly more efficient, but we'll revise that opinion in a moment.

Since we do have revenue figures for the top four vendors, we can also look at their revenue per employee. This is a standard efficiency metric and more directly comparable across companies.  Here's that data, along with revenue per client.

These figures put the client-per-employee ratios in deeper perspective. They confirm that Eloqua has improved efficiency, and by far the highest revenue per employee in the industry.  The figures may be be overstated (see footnote) but even more conservative values would leave Eloqua in first place.  The figures also confirm that Infusionsoft’s cost structure is pretty much stable.

The news is better for HubSpot, whose apparent productivity decrease (measured in clients-per-employee) vanishes when you measure revenue per employee instead. The difference is the growth in revenue per client (which, I’ll remind you again, is only my personal estimate).

The story is even more dramatic for Marketo, whose 6% improvement in clients per employee becomes a 23% gain in revenue per employee, boosted by a 16% increase in revenue per client.  Impressive, but let's hold the applause until we see the actual results.


Whew, that’s a lot of numbers. Maybe only industry insiders will find them as interesting as I do. But other marketers should also find them helpful as they try to understand each vendor's business situation and determine how well it matches the marketer's own needs.

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* And that's using Eloqua-provided figures of 900 clients as of mid-2011 and 1,375 for mid-2012, which yield a 53% year-on-year growth rate.  The revised S-1 published in mid-July showed 42% year-on-year revenue growth.  A 42% growth rate would yield 2012 revenue of $101 million vs. my estimate of $110 million, and a 7% drop in revenue per customer to $73,455.  Ouch!  On the plus side, even the adjusted $288,571 revenue per employee is higher than anyone else, and a 16% improvement over 2011.

0 Raab Report: B2B Marketing Automation Industry Is Getting More, Not Less, Fragmented

I’ve gotten used to thinking of the B2B marketing automation industry as entering a consolidation phase, during which a handful of dominant vendors emerge and small vendors drop away. That’s why I was a bit surprised when yesterday’s blog post showed that the “big four” industry vendors (Infusionsoft, HubSpot, Marketo, and Eloqua) are actually growing slower than the “next four” largest (Pardot, Act-On Software, Net-Results, and SalesFusion)*. In other words, the industry is becoming less concentrated, at least for the moment.

In fact, this trend extends back for the past two years, which is as far as my VEST data goes. It likely extends still further, and, on reflection, this makes sense: at the start of a new industry, there are just one or two pioneering firms with no competition and, thus, 100% market share. This share can only drop over time as new entrants emerge. It's only in the later stages of consolidation – after crossing Geoffrey Moore’s chasm – that the dominant vendors really take control. For B2B marketing automation, we’re not there yet.

The table below shows all this in glorious detail: the big four vendors grew more slowly on a percentage basis than the next four, even though the big four added more clients in absolute terms. The figures for "other" are a bit misleading because the 2011 and 2012 figures include a few more companies than the 2010 data.  But they're directionally correct.

Share of clients somewhat overstates the dominance of the big four because Infusionsoft and Hubspot serve such huge numbers of small companies. Revenue would be a better measure but I don’t have reliable figures for the smaller vendors. I do have employee counts, at least for the top eight companies. They make the next four look more important: while the next four have just 12% of the clients, they have 18% of the employees.  This is up from 14% of employees a year ago, so the fundamental story is still the same: the next four are growing faster.

What all this means in concrete terms is that a new vendor can still challenge the current market leaders.  Both Pardot and Act-On are doing exactly that. Their success isn’t guaranteed and it’s not clear how much longer the window of opportunity will remain open. But, for now at least, the game isn’t over.

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* Actually, Genius should place in this group, since it has 900 clients.  But that information reached me the day after this post was written.  They're also growing much more slowly than the vendors listed here -- up from 700 clients a year prior (29% growth, vs. the 139% growth of the current "next four").  So I think the point about smaller vendors being able to grow quickly is better supported by keeping the existing data in place.

0 Raab Report: B2B Marketing Automation Revenues to Hit $525 Million in 2012

I’ve just released the latest edition of my B2B Marketing Automation Vendor Selection Tool (VEST), which contains detailed analysis of all 22 B2B marketing automation systems. Serious marketing of the new edition is yet to begin, but anyone considering purchase of a marketing automation system can buy the VEST now at the www.raabguide.com Web site.

The new report contains a rich trove of industry information. The one item that people usually find most interesting is the size of the industry. I put this at $325 million for 2011, a 50% increase from 2010. With 2012 half finished, I can now make a reasonably solid estimate for this year. I find the growth rate has actually accelerated to 60%, for a total of about $525 million.

I come at these figures in two ways.

Installations by industry sector. Vendors in the VEST are asked for estimates of their client counts by company size. We distinguish four segments: micro-business with under $5 million revenue; small business with $5 to $20 million revenue, mid-size business with $20 to $500 million revenue, and large business with over $500 million revenue. Most vendors do provide the sector breakdown, although some are pretty rough estimates.  For a couple of vendors, I’ve used my own estimate based on past data.

Using the sector counts plus estimated revenue per client for each sector, I can calculate the revenue by sector and for the industry as a whole. Since the client counts are mid-year figures, they should roughly equal the full-year average. I’ve only included figures for vendors who specialize in B2B systems; none of the other vendors (Neolane, Oracle, Silverpop, Aprimo, MarketingPilot) are provided estimates of the B2B portion of their client base.  The table below shows my calculations:

The total comes to $362 million estimated 2012 revenue. I estimate the non-B2B specialists and other marketing automation vendors (IBM, SAS, SAP, etc.) who are not listed in the VEST will have another $165 million in B2B revenue, for a total of $527 million.

Revenue estimates for individual vendors. The second approach starts with the four largest B2B specialists: Infusionsoft, HubSpot, Marketo, and Eloqua. Each has announced revenue for 2011 (formally or in press interviews) and two, Infusionsoft* and Marketo**, have made forecasts for 2012. I estimated 2012 revenues for HubSpot and Eloqua based on their client counts and revenue per client.  I then estimated revenue for the other specialist vendors by combining results from two methods: estimated revenue per employee and estimated revenue per client. Finally, I’ve added figures for the non-specialist vendors, using the same assumptions as before. The table below shows the results.

As you see – and I swear I didn’t cook these numbers – this gives $525 million, almost exactly matching the other method.  

Of course, there's more to these figures than just the industry size.  One interesting point is that the “other specialist” vendors are actually growing faster than the big four vendors. This is a bit of a surprise, since we’d expect the industry to consolidate and squeeze out the smaller players. Still, remember that the big four control 75% of the revenue. 

The difference is client growth actually larger than the revenue estimates suggest.  The table below shows that the client base of the “other specialists” grew by 80%, which is faster than any of the big four.

One caveat is that a number of the smaller vendors didn’t provide updated client counts, and they may be vendors who were not growing much. But the reality is that the next three largest vendors (Pardot, Act-On, and Net-Results) did provide data, and each grew by well over 100%.  So the missing vendors don't have enough volume to affect the big picture.


I’ll share one final set of data that also points to industry strength. The table below shows revenue per client for the big four vendors over the past two years. These are actuals except for the 2012 figures for HubSpot and Eloqua, and I consider those to be educated, conservative guesses.

This table shows a consistent increase in revenue per customer across all vendors and all years. Given the intense competition within the industry, that’s pretty impressive: it shows that the big four vendors are managing to increase their revenue per client, which all must do to become profitable.  I suspect the increase is less the result of firmer pricing than of broader product lines that let the vendors sell more to each customer.  Nor does this mean that industry prices are rising: it’s possible – in fact, likely – that the smaller vendors are selling for less than their larger competitors, and that the average price in the industry is still dropping.

All told, this paints the picture of a healthy industry: still growing rapidly, still open to competition, and supporting sustainable prices.   It's a cheery bit of news.

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*Infusionsoft "expected revenue of $40 million in 2012" (Customer Experience Matrix, April 14, 2012)

**Marketo "revenues last year grew 140% over the year to $35 million. Management expects revenues to double during this year" (Sramana Mitra blog interview with Phil Fernandez, July 21, 2012)

0 The Marketing Funnel Is Dead. Let's Have Dessert.

Last week’s post on lead scoring attracted more positive attention than I expected. This was doubly surprising because first, I didn’t think lead scoring was such a hot topic and second, I don’t really agree with the approaches I described.

To clarify that second point, I’m not saying what I wrote was wrong or insincere. Rather, I consider it an accurate description of an approach I find problematic. The approach was using lead scoring as a way to define lead stages. My problem is the concept of lead stages themselves.

This verges on heresy, but I’m having an increasingly hard time with lead stages as a way to organize a marketing program. Of course, stages make perfect intuitive sense, and they’re ultimately based on the AIDA (Awareness, Interest, Desire, Action) model of the sales process that has been around for more than 100 years.*

But we all know in our heart of hearts that real buyers don’t follow such an orderly sequence. Indeed, there has been a fair amount of research questioning the validity of AIDA and similar “hierarchy of effects” models. The fundamental criticism is that decision making isn’t as rational as AIDA suggests because emotions play a much stronger part than AIDA allows. I’d also add – without a shred of empirical proof, thanks for asking – that B2B decision processes flit among stages in no particular sequence, depending on who asks what questions at any given moment. This randomness is abetted by the Internet, which makes information appropriate to all stages equally accessible on demand. But I suspect the process was always more chaotic than marketers cared to admit.

I’d further argue that buyers’ interests are especially fluid early in the purchase process, which is where marketers are involved. It may be more structured towards the end where salespeople can shepherd buyers through a defined set of stages. No, I don’t have any evidence for this either.

The point is this: if buyers don’t move through a fixed set of stages, then it doesn’t make sense to use lead scoring to determine which stage a buyer is at. Nor, for that matter, does it make sense to structure lead nurturing programs to lead (or follow) buyers from one stage to the next. As I said, heresy.

But any jackass can kick down a barn.** I wouldn't discard the funnel model without offering a better alternative – and by better, I specifically mean more effective at producing productive leads. Here’s my two-part modest proposal:

- within nurture programs, leads should be offered whatever materials they are most likely to select next, based on their recent behavior. This is exactly the same as offering customers the products they are most likely to buy (think Amazon book recommendation or Netflix’s movie suggestions) and it can be based on similar advanced predictive modeling technology. And, just as Amazon and Netflix offer more than one option, nurture programs should also offer several items – within limits, since too many choices can depress response. There’s an important humility in offering choices: it recognizes how poor we are at predicting what people want.

- for lead scoring, the goal is to predict which leads the sales force will like. I chose that word carefully – it’s not a question of whether sales will accept a lead, but whether they’ll decide it’s worth sustained effort. Yes, there could be a “like” button that lets sales rate the leads, but don't be so literal-minded.  It would be simpler and more effective to check how much activity sales has invested in the lead within, say, thirty days after they received it. Leads that sales is working are, by definition, leads that sales thinks is worthwhile. Leads they don’t work should never have been sent to them. This approach doesn’t magically solve the problem of connecting marketing leads to sales results, but it’s easier than tying leads to actual revenue.

Of these two proposals, the first one is the more radical since it implies a change in the structure of nurture campaigns. Today, sequential campaigns are the gold standard and complex branching structure are the mark of sophistication. A campaign that just presented the most relevant materials would have a vastly simpler structure – essentially a big loop that kept coming back with more messages, which would only differ in which offers they included. The sophistication would lie in the offer selection, not the campaign logic. Lead scoring's only role would be to run in the background and continuously assess whether a lead is ready to send to sales.

Even this choice-based approach doesn’t fully discard a sequential model. You need something to help decide what kinds of content to create, and the most logical tool is the content matrix that marketers already use to ensure they have content for all personas at all buying stages. But while you’re still cooking a full range of dishes, you’re offering them as a buffet rather than a fixed-course dinner. If a customer wants to eat dessert first, why argue?


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* Usually attributed to Elias St. Elmo Lewis in 1898, although there is some controversy.

** Sam Rayburn, although I bet he didn't originate it.

0 3 Ways to Use Lead Scoring Within Your Marketing Automation Programs

I wrote last week about the difficulty of linking marketing leads to sales results. One reason the topic was on my mind is I’m also thinking a lot these days about lead scoring. The practical use of lead scoring is to decide which leads to pass from marketing automation to sales, or, even more pragmatically, to predict which leads will be accepted by sales.* But the ultimate goal is to identify the leads most likely to generate revenue. Building an accurate scoring model therefore requires an accurate view of how leads and revenue are connected.

For all the reasons I discussed last week, that lead-to-revenue connection is hard to make. This is one reason that most lead scoring projects focus instead on the criteria that salespeople use in judging which leads to accept. The other reason is that salespeople can decide which leads they’ll work on – so giving them what they want, regardless of whether it’s what they really need, is the key to lead scoring being considered a success.

Many companies today have inserted a phone call between marketing automation and the sales department, screening every plausible lead before sending them to actual salespeople. This reduces the need for scoring accuracy because the phone call will clarify whether the lead is sales ready.  Since the cost of a missed opportunity is much higher than the cost of a wasted phone call, scoring in this situation must simply find all leads with a reasonable chance of success.

In short, scoring programs face two scenarios:

- for scores that directly determine which leads are sent to sales, accuracy is needed but data on past results (necessary to build a good model) is scarce

- for scores that determine which leads get a screening call, accuracy isn’t very important.

Perhaps this is why so few companies use lead scoring (just 19% in a recent MarketingSherpa study) and why the scoring models tend to be simplistic. Investment in more sophisticated techniques, such as statistically-based predictive models, is rarely worth the cost.

There is, however, another use for lead scoring: assigning leads to stages as they move through the marketing funnel.**

Conceptually, assigning leads to funnel stages is quite different from calculating their probability of making a purchase. A funnel stage is defined by meeting specific criteria such as BANT (budget, authority, need and timing) and engagement (downloading a paper or providing contact information). This is more like a checklist than a numeric score, although items like the number of specified behaviors may be calculated. Still, it's sometimes convenient to use score ranges as stage definitions.

In this context, scoring can be used in three ways.

- assign points  to directly to stage criteria.  For example, imagine a three-stage funnel of Respondent (replied to an email), Qualified Respondent (meets BANT conditions) and Sales Ready Lead (demonstrates engagement). If the scoring rules give 100 points for a response, 100 points for meeting BANT criteria, and 100 points for demonstrating sufficient engagement, then people with 100 points are Respondents, people with 200 points are Qualified Respondents, and people with 300 points are Sales Ready Leads. This is a common approach, although it’s not much different from applying the same rules to classify leads directly.


- treat the score as a probability estimate of reaching the final goal (sales readiness, sales acceptance, or revenue). Under this approach, a Respondent might be someone with a goal probability of under 10%; a Qualified Respondent might have a goal probability of 10% to 50%, and Sales Ready Lead might have a goal probability above 50%. This method avoids the need to define specific lead stage criteria, replacing them with objective predictive modeling methods that are likely to be more accurate.

- treat the score as a probability estimate of reaching the next stage (Respondent, Qualified Respondent, etc.). This retains the explicit stage criteria, which may help marketers visualize who is in each stage and how best to treat them. The predictive model provides additional segmentation within each stage, so marketers can focus their efforts on the most promising leads. Since linking leads to stage movement is easier than linking them to revenue, these predictive models are easier to build.

Today, most companies probably do a hybrid of the first and second options. That is, they assign points based on specified criteria (first option) but assign stages based on point ranges (second option). This combines the familiarity of criteria-based scoring rules with the convenience of numerical stage definitions, making it the easiest method available. But it is also doubly arbitrary, since neither the point values nor the range boundaries can be measured against an objective standard.

I’d suggest that marketers move towards a purer version of the second method, building statistical models that predict the final goal (revenue if available; sales acceptance or sales-ready lead criteria if not). Stage definitions can be arbitrary ranges but correlated against existing stage criteria. Eventually, marketers may want to move toward the third method, with separate models for each stage. This makes it easier to focus on advancing leads from one stage to the next while retaining the rigor of a statistically based approach.


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* For example, Marketo’s Definitive Guide to Lead Scoring defines lead scoring as “a shared sales and marketing methodology for ranking leads in order to determine their sales-readiness.”

**Eloqua’s Grande Guide to Lead Scoring puts it nicely: lead scoring “helps marketing and sales professionals identify where each prospect is in the buying process.”