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Summary:

Businesses can now leverage big data for the benefit of driving marketing insights. According to Ajay Agarwal of Bain Capital Ventures, this fundamental shift will create several multi-billion dollar winners, and new technology companies will emerge as the marketing equivalents of Salesforce and SAP.

Agarwal_Enterprise Marketing Function_cash image

“By 2017, a CMO will spend more on IT than the CIO.” —Gartner Group

For the first time in history, businesses can leverage big data for the benefit of driving marketing insights. We are at the very beginning of this wave, but this fundamental shift will create several multi-billion dollar winners. And a set of technology companies will emerge as the marketing equivalents of Salesforce and SAP.

Based on this thesis, my partner Scott Friend (founder of Profitlogic) and I have been actively investing in this arena on behalf of our firm, Bain Capital Ventures. BloomReach, CQuotient, HookLogic and TellApart are among our recent early-stage investments in this new category of marketing innovation.

At the heart of each of these companies are CTOs and engineers who have experience with big data and modern techniques for data mining, analytics and machine learning. These companies typically charge on a performance basis as opposed to charging traditional enterprise software license fees. And they are having a significant impact on their customer’s revenues and profitability.

Why has it taken so long to get here? Enterprise software began in the back office

The world of enterprise application technology has gone through a number of iterations and evolutions over the past 30 years. In the late ’70s and ’80s, enterprise software consisted of mainframe and minicomputer solutions designed to handle various back-office functions: finance, HR and manufacturing. Over time, the winners in each of these functional applications areas — SAP (manufacturing), Oracle (financials), PeopleSoft (HR) — began expanding into the adjacent categories, spawning the ERP wave (enterprise resource planning). In the ’90s, these companies became behemoths, thanks to a concurrence of factors — the movement to client server infrastructure, the trendiness of corporate “reengineering,” the urgency around Y2K and the growth of the large system integrators.

The focus on the front office

As of 1995, the majority of enterprise software dollars were focused on back-office functions while the sales and marketing functions were largely ignored or served by smaller point-solution vendors. This opportunity led to the creation of several companies, including Siebel and Trilogy (the company I was with for eight years). Siebel became a very large and successful organization and was ultimately purchased by Oracle for $5 billion (its market cap at one point was over $60 billion). More recently, Salesforce has leapfrogged Siebel with its SaaS approach. With a market capitalization of $17 billion, it has become the new industry heavyweight.

Despite the last 15 years of automation of sales functions, marketing functions have been underserved and underpenetrated in terms of enterprise software. While the other corporate functions have all created multibillion-dollar software companies, the marketing function has only had one exit north of one billion (Omniture). (See exhibit below.)

[Note: Oracle value represents an estimate of only the value of their financial software application business. SAP represents an estimate of the value of only their manufacturing suite. Siebel, Peoplesoft and Taleo values are based on the prices at which those businesses were sold to Oracle. SuccessFactors' value is based on its sale price to SAP. Baan’s value is their peak market cap. Omniture’s value is based on its sale price to Adobe. Intuit, Netsuite and Salesforce.com values are based on it public market values as of 2/27/12. Disclosure: Bain Capital Ventures was an early investor in Taleo.]

Data versus process 

Historically, the challenge with marketing automation is that it has always been about “process,” not about “data.” Back in the ’90s, marketing apps were tools used to manage campaigns. More recent categories, such as email marketing or marketing automation, are focused on process automation — how to take a set of manual tasks and streamline them, track them or automate them.

However, marketing-focused software solutions have never been about strategic data. Unlike financial software, which serves as the system of record for the general ledger; or manufacturing resource planning software, which “owns” the bill of materials; or sales-force automation, which is the system of record for the pipeline and the funnel, there is no equivalent for marketing. Until recently, it has been difficult or impossible to collect structured data on marketing prospects who were not customers — that is, folks who had not yet decided to buy and were still somewhere upstream in the purchase funnel. Absent this data, the best marketing technology could do was improve the process of decision making as opposed to delivering real insights.

The web changes everything

As more and more businesses across all sectors of the economy move to the web, this kind of data — and a massive amount of it — is finally available.

  • A web business can mine thousands of signals from its prospects based on the hundreds of actions a consumer might make on a website (checking a price, looking at an image, reading a review, typing in a detailed search query, etc.).
  • The holy grail of closed loop marketing is finally here. With sophisticated technology and analytics, marketers can link spending on customer acquisition directly to a set of downstream customer actions — whether those actions take place on the web, on a mobile device or in a physical location.
  • Consumers with smartphones are conveying their intent while scanning QR codes, downloading mobile coupons or simply walking into a store with their location-aware device.
  • Social networks are providing a new source of demographic data that, combined with Facebook’s Open Graph, offer marketers a new treasure trove of information.

I am excited about this next wave in enterprise technology. Marketing will finally emerge from the backwater and will give rise to several multi-billion dollar companies.

Ajay Agarwal is a managing director at Bain Capital Ventures’ Palo Alto office, where he focuses on early-stage technology investing. Prior to joining Bain, Agarwal ran sales and marketing at Trilogy. 

Image courtesy of Flickr user 401K.

For more on how big data is shaping technology, be sure to check out GigaOM’s Structure:Data Conference in New York City on March 21 and 22.

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  1. Great content! @WirelessPress

  2. You should check out setlogik.com

  3. Isnt this what is behind IBM’s recent spate of purchases eg. SPSS, Unica, Coremetrics etc. And ofcourse Adobe’s buy? I am not sure I see them switching to a performance based payment model. The payment method seems to me to be orthogonal to market demand for marketing intel tech.

    1. I agree that the payment approach isnt a necessary condition to building a multi-billion dollar winner in this category. However, I personally believe, that those companies with a performance based model are better positioned to be the big winners.

  4. Jeff Molander Saturday, March 17, 2012

    Read my lips: HubSpot (www.hubspot.com) and their like!

    1. I love Hubspot! Great team and company.

      1. Thanks, glad to hear it! (Oh, and by the way, unsurprisingly, HubSpot happens to agree with the premise of your article). :)

  5. Just completed a research project on this topic under contract to CSC/Leading Edge forum entitled “Socially Awkward: Preparing for the Co-Evolution of Marketing and IT”. see” http://lef.csc.com/projects/100

  6. Joseph Budner Elad Saturday, March 17, 2012

    Ajay, great article. I agree 100%. Key would be to (a) being able to mine content; and (b) combine content with data to drive intelligent marketing decisions. It is coming on the horizon without a doubt.

  7. agree that the web & bigdata changes everything predicated on having the right analytics solution

  8. Jonathan Follett Saturday, March 17, 2012

    I agree with Jeff that HubSpot and similar SaaS companies are on the rise in this new sector. Being from Boston, it’s interesting to me that there are actually a number of marketing optimization, big data, and analytics companies in the region. If Ajay’s predictions are correct, and this turns out to be a multi-billion dollar sector, then this bodes well for our regional economic health. In response to Ajay’s article, I wrote a blog post here with a regional take on marketing optimization software: http://bit.ly/w832vi

    1. Completely agree. Lots of exciting marketing oriented companies in Boston. In addition to the ones you mentioned in your post, I’d include cquotient.

  9. Great piece that’s right on especially about the historical underinvestment in marketing software/tech and that you need to be about data and not just process. One disagreement I may have with you though, Ajay, is that existing performance-based (vs. enterprise software) pricing is sometimes problematic because even the best forms of online acquisition measurement are still a proxy for real revenue performance and customer profitability (good example – CPA because it may take 3 months to know likely lifetime profitability of acquired customer). If there was a true revenue share between vendor and marketer, that would align incentives – short of that you find that vendors will often optimize towards goals that are proxies for true performance and the “model risk” can become larger and larger the more “successful” these programs become and the more volume they drive. This has happened time and again in the online acquisition markets over the last 10 years from buying clicks, to mortgage leads, to email addresses for daily deals sites. A fair margin makes sense- but I’d argue this will approach what an enterprise-software model’s profit would over time (absent stupidly-agreed to exclusivity clauses). Because when customers discover overly large margins on performance-based marketing buys (and get doubly upset in some cases they are essentially giving away their own customer data to vendors for free, to buy back on a “performance basis”) when that transparency is provided – for example while I’ll bet most marketers buying social media on a CPA/cost per fan basis don’t know this, Facebook requires API vendors to create a unique account for every advertiser and disclose true media costs to customers on demand regardless of the way they are charging the customer for media buys. A business model that relies on pricing and cost transparency not to exist widely today, so as not to piss off customers, is vulnerable in a more transparent future.

    1. Rob,
      The performance model does have a set of challenges today, but my thesis is that with the proliferation of data and better measurement/analytics, we will be able to come much closer (over the next few years) to aligning incentives and getting to a fair rev share.

  10. CPA/CPV type performance marketing and based on ‘search intent’ (with users found on content, across an entire marketplace) will prove successful in an existing ‘messy as hell’ ecosystem.

    With exclusive access to and the processing of over 5 Billion search queries a day – marketers get to target down to the IP ‘addy’ level, in the entire US, UK and Canada, with reach at City levels in a number of other markets. My feeling is, that:

    “The Ad-tech Landscape Is Due For A Shake-out.”

    http://seekingalpha.com/instablog/36191-lookingconfident/412031-the-ad-tech-landscape-is-due-for-a-shake-out-pareto-s-theory-will-prevail

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