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Marketing is the next big money sector in technology

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“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 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.

33 Responses to “Marketing is the next big money sector in technology”

  1. Phil Fernandez

    This article hits the nail on the head in a number of ways, especially the increasing role of the CMO in the IT decision-making process. And because of Big Data, I would add to that the new role a CMO has in the revenue discussion. Regarding the revenue discussion, what is making marketing technology both enticing and imperative is its ability to impact the bottom line. With Big Data comes the ability to connect marketing activity to dollars produced. For example, analysis can now show a campaign on Facebook led to X new leads in the system, that marketing automation brought them to a sales-ready state after Y touches, and then sales was able to convert Z into paying customers; in two years we can even get a read on those customers’ retention (or attrition) and repeat spend. That’s a lot of revenue (or if not, having insight into why) from a single Facebook campaign!

    Thus, the CMO and marketing managers now have insight into the revenue effectiveness of their own activity, throughout the entire ‘revenue cycle.’ The optimization of this cycle is indeed likened to the efficiency improvements we saw in manufacturing and supply-chain during the 80s and 90s. What Ajay is touching on is the technological revolution we’re seeing in the ‘demand chain’ — how businesses can grow revenue in a new world of online and content-driven buyer behavior.

  2. Ajay, great article. Marketing technology will however find it hard to get adopted among “right brain” marketers. But no question that this is the future. How companies store, transform & use their data will become as potent a marketing tool as Brand equity itself! Companies have huge amounts of data now and there is technology & skill sets available to decode it. I have written about this here, do have a look:

  3. Cloud, mobile and virtual technologies are transforming the event management technology sector from a traditional logistics orientation into a significant component of the marketing mix. For the first time attendee “signals” aggregated at events or across multiple events can be key predictors of actionable buying behavior post-event.

  4. Kyle McNabb

    Good post, but I think it only tells half the story. Our research shows engagement is the driver behind the need for enterprise marketing investment, but that enterprise marketing only plays a role, the other is software development & engineering.

    Peoples’ adoption of mobile devices, usage of social, and the ever increasing expectations we have for how firms must engage with us across channels and touch-points now forces many executives to rethink strategic investments. We now see executives prioritizing investments to both build customer knowledge and act on it to deliver to engagement expectations, and de-emphasizing investments into the areas traditionally supported by some of the app vendors you identified.

    Enterprise marketing solutions can help a firm build that customer knowledge, and they play a role in delivering it to drive engagement. But you can’t buy engagement, you have to build it into your customer supporting processes and touch-points (e.g. Web, mobile, call center) if you hope to deliver to your customers’ expectations.

    The need to build engagement is driving many enterprises to build a competency around software development & engineering, and no longer looking at it as a commodity or the domain of the Valley, Austin, or Seattle. These enterprises need the same tools and solutions the CTOs and engineers of the tech firms you’re investing in. We expect to see great investments into enterprise tools, solutions, and capabilities that help enterprises build and manage a software development competency in this age of constant software-fueled, consumer-led disruption.

    Kyle McNabb
    Forrester Research

  5. Tanuj Raja

    Great article. Absolutely agree – Closed loop marketing is the future. CaptureCode is enabling our customers to do exactly that…with great results.

  6. Tony Frazier

    Great post Ajay. I agree that applying big data analytics to marketing use cases presents a huge opportunity. This is the thesis behind GeoStellar a start-up working to transform alternative energy marketing and PlaceIQ which Steve Milton co-founded to change the game in location based marketing.

    • Ajay Agarwal

      I don’t consider those companies software businesses. A marketing executive was moving media dollars from one channel to another (TV and print to online). The CMO was not purchasing technology.

  7. David Wolf

    As a mid level size company vendor of online marketing, I completely agree with where the market is heading. The only think I think is off in this article is how fast it will happen. We are already see medium size fish eating small fish to roll up critical human capital and process, and the growth in awareness of data value is seeing significant increases in the C-suite of our customers. Bain is making some excellent strategic bets on these types of processes. Especially since the performance numbers can be dramatic. Great article, and great insight.

  8. Robert Pease

    Great post Ajay and I share your opinion on marketing technology as a huge growth area. We are finally getting to a point where marketing activities can be instrumented and measured like other categories of enterprise software. Unlike these previous categories of enterprise software, I think the true winners will be defined by a buyer-centric orientation that rejects the attempts to “scale personalization” that have been part of a lot of marketing tech thus far (email marketing, etc.) and a focus on customer engagement vs. lead management.

  9. Jon Ferrara

    Great post Ajay! I believe that most businesses are in the eyeball business. They all exist to attract and retain customers. The old days of yelling at customers are over. Social Business is the new way of building a company. New Social marketing platforms are evolving and Big Data combined with the Social Graph presents an incredible opportunity to shift the way marketing is done.

    My question is what do you do once you get their eyeballs? Marketing is only effective when leads are properly followed up on. Once you have their attention you need to engage and convert. The problem is that traditional/legacy CRM systems are not engagement platforms as much as they are reporting systems. CRM was created to track sales activities, forecasts and lead status. Sales people do not live in their CRM systems. They live in their Outlook or Google mail/calendars and feed the CRM so reports can be run. True engagement starts with listening and that is now done in Twitter, Facebook, LinkedIn, groups & blogs. You have to CC & BCC emails and activities to get them into CRM platforms and Social is an after thought ineffective bolt-on.

    The whole model of CRM is broken. Until an integrated Social Listening and Engagement platform that enables a team to effectively follow up and nurture these great leads the whole system will be incomplete.

    Jon Ferrara   
    CEO | Nimble – Social Relationships, Made Easy.
    @Jon_Ferrara |

  10. Charles Oppenheimer

    “A web business can mine thousands of signals from its prospects based on the hundreds of actions a consumer might make on a website”

    Arjay as a veteran of enterprise software I don’t think this new future is nearly as exciting as what could happen. Across the web at an increasing rate consumers are stating their intentions to businesses on their own terms, telling companies directly what they want to buy and what they have problems with. This trend -of “markets being conversations” was forcasted by the ClueTrain Manifesto so many years ago and coming to life with Twitter, FB, and Pinterest, not to mention blogs – all tools that consumers own, not businesses, and therefore are that much more valuable for businesses.

    The specter of businesses hording and analyzing data about what *you* do, while humming “wahhaaahahaaaa” at an increasing rate sounds evil to some – but it is really just inefficiency, unnecessary layers of indirection to a truly efficient market.

    The technology is interesting, and as your article states it does have better prospects that typical CIO spend – agreed. But I’ll challenge you to think a little bigger as a investor.. I certainly am as an entrepreneur ;).

  11. Ross Bradley

    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.”

  12. Rob Leathern

    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.

    • Ajay Agarwal

      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.

  13. Jonathan Follett

    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:

    • Ajay Agarwal

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

  14. Joseph Budner Elad

    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.

  15. 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.

    • Ajay Agarwal

      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.