My last post noted that Yodlee, a data aggregation provider in financial services, had filed to go public.  This week a provider of cloud-based marketing automation, Yodle, also filed.

Marketing automation software is one of the great growth stories in B2B and B2B2C over the past 10 years.  The Internet and cloud have forever altered marketing departments just as they have IT.  Every small business, in particular, needs:

  • a web presence
  • to understand SEO and SEM
  • a mobile strategy
  • a social strategy and
  • e-mail marketing–just to name a few

Players in the space include Intuit, Google, GoDaddy, Angie’s List, Constant Contact and a host of others.  (Eloqua and Marketo, two giants in the space target larger companies.)

Yodle has a broad offering to help local businesses establish a basic web and social media presence.  Yodle also has tools to connect the marketing function to the back office. In addition, they have a very interesting offering (Centermark) designed specifically for franchise networks and other multi-location providers.  The basic diagram of their offering is as follows:

2014-07-13_12-25-44

Yodle targets 7 million local businesses and now has about 50,000 customers.  As with every cloud-based marketing automation provider selling to small businesses, the most critical questions are:

  • Has Yodle figured out how to acquire clients at a reasonable cost?  (CAC for SaaS metrics aficionados) and
  • Does Yodle keep these customers long enough, at a high enough gross margin to make money?  (Lifetime Customer Value (LTV) in SaaS metrics terminology)

Yodle claims to have solved these issues:

Our competitive strengths result in what we believe is an attractive business model. Our low customer acquisition and onboarding costs minimize our initial investment to bring on new customers and allow us to achieve rapid payback. We define payback as occurring when the costs associated with acquiring and launching a cohort of new customers we acquired directly (i.e., not through resellers) in any given quarter is offset by the ongoing cash flow from those customers, less our ongoing costs. We are typically able to generate positive cash flows within the first year after acquiring and launching a cohort of new customers, including the impact from customers who do not renew their subscriptions or service during the first year and excluding overhead costs. As a result, we believe our business model benefits from rapid payback. We refer to customers who we acquired directly (i.e., not through resellers) and who remain as customers after their initial year as our tenured customers. Tenured customers represented approximately 41% and 44% of our direct customers as of December 31, 2013 and March 31, 2014, respectively. The percentage of our direct customers that are tenured customers generally has been increasing over the last year. For the 12 months ended March 31, 2014, we experienced a monthly average revenue retention rate of 97.5% for the media and platform revenues of our tenured customers. The monthly average revenue retention rate for our tenured customers generally has been improving over the last year, and we expect the monthly average revenue retention rate for our tenured customers to continue to improve as our mix of revenues shifts toward revenues from platform products, as revenue derived from customers who subscribe to our platform products generally exhibits a higher retention rate than revenue derived from customers who purchase our media product. We believe that our low customer acquisition and onboarding costs, rapid payback and high monthly revenue retention of our tenured customers results in a business model that generates attractive customer economics and high returns on our initial investment.

 

From Yodle’s prospectus, it is not possible to exactly calculate their CAC or LTV, but we can estimate both.  Yodle’s CAC bounces around a bit, but appears to be in the $5,000 to $6700 range based on total quarterly sales and marketing expenses and new customers added.

Using Yodle’s monthly average retention rate (97.5%) for customers more than a year old and those sold directly, we can determine that for these customers the average tenure is 40 months.  Yodle also tells us that their flagship product now sells for under $300 and has a gross margin of about 70%.  This makes Yodle’s LTV about $7500. This LTV is pretty tight relative to CAC but it does mean each new customer added contributes to Yodle’s fixed costs.

Before investing, I’d like to see clear numbers on CAC and LTV  from real cohorts. This is the kind of information that Angie’s List provides–much to their detriment!  The fact that Yodle states its retention rate in monthly terms (which always sounds better) and makes several exclusions from their calculations makes me a little nervous.  In annual terms, Yodle’s retention rate is about 74%, though they say it is improving.

Yodle is going to need to improve retention, while fighting off intense competition, if it wants to be a great call.

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