Published August 17-25, 2023
In my previous series, I highlighted the urgent need for martech companies serving B2C/D2C businesses to shift towards a performance pricing model. This change would enlarge their Total Addressable Market (TAM), capture part of the AdWaste, and ultimately transform brand P&Ls. Here is a concise summary of the crucial takeaways.
There exists a glaring imbalance in the budget allocation of brands to adtech and martech. Despite adtech’s costly and often less productive customer acquisition strategies, brands persist in funnelling the majority of their budget into this area while under utilising martech’s customer retention and revenue growth capabilities. With increasing pressure from investors, brands are now seeking profitability over growth-at-all-costs, which opens up an opportunity for a transformative shift in martech: a move towards performance-based pricing.
Martech must learn from adtech’s evolution, particularly its shift from CPM (cost per thousand impressions) to CPC (cost per click), and transition from user- and usage-based pricing models to ones focusing on utility and uplift. Google AdWords’ successful industrialisation of the pay-per-click model, which enhanced advertising efficiency, accountability, and effectiveness, serves as a key example.
Leading martech companies like Netcore need to pioneer this transformation by selling based on tangible business outcomes rather than mere volume of communication. Adopting this approach could significantly expand martech’s TAM, helping it catch up with adtech’s vast $450 billion market. In addition, a performance-based pricing model can fuel exponential growth for both martech companies and brands.
In the essay, I proposed a comprehensive 11-point agenda for martech companies transitioning into Martech 2.0 entities. This includes defining outcome-based performance metrics, moving towards performance-based pricing models, stimulating product innovation, establishing robust tracking and attribution capabilities, and upholding transparency and trust. In this paradigm shift, maintaining regulatory compliance, ensuring platform flexibility and scalability, optimising acquisition strategies through martech, forging strategic partnerships, and educating customers about the new model are also vital. Embracing the ‘progency’ model, where martech companies supplement their products with a thin layer of services, is key to ensuring the maximum benefits of this transformative approach.
Martech 2.0 heralds a pivotal shift in martech’s business model, marking a new era where companies can deliver more value while optimising resources. The time is ripe for a transformation akin to adtech’s performance-based pricing model shift two decades ago, allowing martech companies to align closely with the profitability goals of the brands they serve. As we look to the future, this transformative approach ensures that martech vendors are not just service providers, but strategic partners whose success is intrinsically tied to their clients’ growth and profitability. This revolution in martech could optimise brands’ budget allocations, minimise AdWaste, and maximise customer value. By fostering a symbiotic relationship, Martech 2.0 is poised to redefine the dynamics between martech vendors and brands, creating a landscape marked by shared success and collective growth.
In the rest of this series, I will play out an imaginary conversation between a marketer of a B2C eCommerce brand and a Martech 2.0 vendor, and discuss the merits of this shift, the innovations to drive the change, the first steps on the journey, and how to persuade the CEO to embark on this transformation.
B2C eCommerce Marketer: Hello, I’m grappling with a significant challenge. The cost of acquiring new customers is rocketing, and while I suspect we’re squandering resources, I struggle to pinpoint where. Traditionally, our focus has been on revenue growth; profitability was never a primary concern – at least for my department. However, the landscape has shifted. I’ve been reading about your performance pricing model in martech which can boost profitability, and I’m intrigued. Can you clarify how it would be beneficial to us?
Martech 2.0 Vendor: I appreciate you reaching out and seeking clarity. To start, let’s delve into the issue at hand. The majority of brands, and I’m sure you’re no exception, allocate around 80-90% of their marketing budgets to adtech, primarily aimed at new customer acquisition. Interestingly, retaining an existing customer holds much more value than acquiring a new one. Studies indicate that customer acquisition costs are five times higher than retention costs, and a mere 5% increase in customer retention can elevate profits by 25-95%.
Let’s talk about AdWaste. Our data suggests that only a third of adtech spending is effective. Another third goes to “bad” spends – where there’s an immediate drop-off post the click or app install. The remaining third is allocated to “reacquisition” – retargeting inactive or dormant customers on adtech platforms rather than reactivating them through your owned channels like email. Half to two-thirds of this bad spend and reacquisition spend can be eradicated.
A dual strategy focusing on maximising sales from existing customers and curbing wasteful ad spending can massively amplify profitability. Here is an illustration of how Martech 2.0 can elevate profitability through a couple of examples: a profitable company (on the left in the table below) could potentially see a 140% profit surge, while a loss-making brand (on the right) could transition into profitability.
To actualise this, we must first identify the key profit killers in your business.
Marketer: I’m eager to learn more about this promising opportunity.
Vendor: Typically, there are three major profit killers in a B2C/D2C business. Firstly, the potential of your app and website might be underutilised due to insufficient data collection on existing customers. This occurs due to isolated point solutions not sharing data, which obstructs effective personalisation. Furthermore, an ineffective onsite search engine might fail to showcase products that your loyal customers are likely to purchase. Such shortcomings impair customer experience on your own platforms.
Secondly, push channels are often used merely as broadcast mediums, lacking interactivity. Generally, the expectation is that customers, attracted by the message, will click through to the website or app. However, as we know, push channel open and clickthrough rates are usually low. These push messages are the most cost-effective way to lure customers back to your platforms. But, if your customers become unresponsive, you’re left with either expensive branding campaigns or retargeting via adtech platforms.
Finally, a substantial portion of the acquisition budget is squandered due to AdWaste, as I touched upon earlier. Shockingly, almost 50% of the advertising expenditure proves to be ineffective. While optimisation strategies for ad spending might seem like an attractive solution, they only offer a minimal reduction, typically around 5-10%, which is insufficient.
Cumulatively, these profit killers can wreak havoc on profitability. Fortunately, we have solutions to mitigate these issues!
Marketer: So, what is that I can do? I already have various martech solutions from best-in-class vendors deployed. We already do segmentation, journey orchestration, automation. I use all the push channels – including email, SMS, push notifications, and now WhatsApp. What am I missing? What is your big idea?
Vendor: I will get to the martech solutions in a bit. Let’s begin with my big idea. In fact, I have two of them: Inbox Commerce and Adtech-Style Martech. Both are industry firsts. These two, combined with some other innovations like Unistack, Unichannel, Velvet Rope Marketing, and Near-Zero CAC are what can boost your profits. As an aside, since I love naming things, I call this ProfitXL or PxL for short. It is about supersizing your profits (making them “eXtra Large”). PxL can also be read to mean transforming P&L.
Let’s begin by delving into the concept of Inbox Commerce. This approach essentially brings the conversion funnel directly to the customer, streamlining the purchasing process. Consider that just 1 in every 33 sessions on a website culminates in a transaction. If we factor in the open and clickthrough rates for push messages such as emails, this figure plummets to approximately 1 in 3000 customer interactions. Inbox Commerce aims to counter this by integrating search, browse, cart management, and recommendations into push messages.
Emails, supercharged by Accelerated Mobile Pages (AMP), serve as the perfect conduit for this strategy. These dynamic “Email Shops” are primed to significantly bolster transaction completion rates. They become even more potent when paired with triggers like abandoned cart notifications, back in stock alerts, price drops, and new arrivals.
Another notable application of Inbox Commerce is for reactivation purposes, offering an alternative to reacquisition through adtech platforms. Atomic Rewards (Mu) and gamification elements embedded within emails can incentivise customers to engage with messages they may have previously overlooked.
The underexploited area at the bottom of emails, known as the footer, holds significant potential for increased user engagement. This area can serve as a multifunctional platform enabling progressive profiling, capturing customer reviews and ratings, facilitating referrals (especially from Best customers), encouraging Mu earn and burn, and promoting relevant offers from affiliated brands. Envision this as a parallel to the ‘comics’ section in a newspaper, which acts as an enticing element that draws readers to flip through the remaining pages. Similarly, these ‘engaging footers’ can captivate the attention of your audience and encourage further exploration within the email.
Moreover, Inbox Commerce is not limited to emails alone; it can be seamlessly extended to other channels such as SMS, WhatsApp, Rich Communication Services (RCS), and even interactive chatbots that could be embedded within push messages.
In essence, Inbox Commerce transfers the commerce experience from the brand’s websites and apps directly into consumers’ inboxes, fostering a seamless, convenient shopping experience. By generating more revenue from existing customers, it reduces the reliance on new customer acquisition for ongoing revenue growth, thereby enhancing profitability.
Marketer: Wow! Inbox Commerce seems like the most significant leap in martech in recent years. I’m eager to put it into practice right away. You also mentioned twinning this with Adtech-style Martech. I’d like to understand how it would work and what kind of effort would be required from my teams who are already stretched running countless campaigns every day?
Vendor: That’s a great question. Indeed, Inbox Commerce aligns seamlessly with the concept of performance pricing in martech. It is an approach where we depart from traditional pricing based on usage (number of messages sent) or users (monthly active users). Instead, we price our platform and services purely based on outcomes – in your case, completed transactions. Imagine us as a Point-of-Sale (PoS) terminal, where you pay a nominal percentage of the revenue we help generate. This alignment of interests puts us on the same side of the table, creating a partnership where our success is inherently tied to your success.
By adopting performance-based pricing, you will gain access to a model that incentivises efficiency and maximises ROI. It allows your team to focus on strategic aspects of campaigns, rather than operational details. In essence, it reduces the stress on your teams, liberating them from the need to run a myriad of campaigns daily, thereby making their efforts more targeted and their results more impactful. In short, our Adtech-Style Martech model allows you to simultaneously achieve scale and efficiency, driving profitability while preserving or even improving the quality of your customer engagement.
Marketer: What would be necessary to kickstart this?
Vendor: To get started, we will leverage three innovative capabilities in your email program: Email Shops, the Reactivation Sequence, and Engaging Footers. These are built on AMP and incorporate numerous cutting-edge features: search with catalog enrichment to ensure more relevant results, one-click payments for seamless checkouts, AI-powered dynamic recommendations that adjust with each cart action, Atomic Rewards (Mu), and partnerships with programmatic ad platforms that create revenue-generating opportunities for both parties. Furthermore, our services team will handle any necessary creative and coding work, ensuring that all messages adhere to your brand guidelines.
We’ll begin by segmenting your existing customers into five distinct groups: Best (top 20%), Rest (middle 50%), Test (bottom 30%), Left (inactive), and Fresh (newly acquired customers). The “Left” segment, which we will reactivate, is an excellent place to start – since these customers are not delivering any revenue for you at the moment. Then, with the “Test” segment, we’ll demonstrate how the “Email Shops” concept works and contrast it with previous results. If the outcomes meet your expectations, we can then extend this to the “Rest” and eventually the “Best” segments. The “Engaging Footers” can be included in every email as it won’t disrupt the main content.
We can have all these features up and running within a matter of days once the customer lists are prepared, and we’ve received permission to send emails. We can either collaborate with your current Email Service Provider or utilise our email delivery capabilities. In either case, there would be no additional cost for you.
With all this in place, we can pave the way for a transformation in your email marketing strategy and significantly impact your bottom line. So, are you ready to revolutionise your customer marketing program and go beyond just engagement and retention?!
Unistack and Unichannel
Marketer: This is genuinely fascinating! You’ve previously mentioned some other interesting concepts. Could you delve into these further and explain how they might bolster profitability?
Vendor: Absolutely. I alluded to four other ideas: Unistack, Unichannel, Velvet Rope Marketing, and Near-Zero CAC. Though these aren’t ground-breaking individually, they can be truly transformative when combined. Unistack, or a “unified stack,” aims to address the issue of integrating diverse point solutions. Over time, marketers have leaned on various point solutions for handling distinct facets of their marketing efforts, like data gathering, customer segmentation, and campaign orchestration across different channels. (I’m sure you’ve also done this.) However, this approach has resulted in fragmented data and integration hurdles, obstructing marketers from achieving a comprehensive understanding of their customers.
Attempts to remedy these issues have been made through Customer Data Platforms (CDPs) and Application Programming Interfaces (APIs), but the fundamental problem persists. Marketers are still wrestling with disjointed databases and inadequate AI-ML effectiveness because of the siloed data, which hampers their ability to deliver optimum customer experiences. The first-generation martech solutions contributed aggregation and automation, but inadvertently created data silos and failed to provide a complete, seamless solution. Unistack consolidates customer data, engagement, and experience management, and full channel control into one platform. Adopting a Unistack approach allows marketers to gain a holistic, integrated perspective of their customers, thereby improving the effectiveness of their customer relationships and unlocking the potential of seamless omnichannel personalisation.
Marketer: You’re absolutely correct. We’re indeed grappling with integrating all our point solutions and are failing to acquire the unified view of our customers you mentioned. What about Unichannel? I’m familiar with “omnichannel”.
Vendor: Unichannel can be viewed as a subtle yet significant refinement of the omnichannel concept. While it’s true that customers crave a seamless experience across channels, it’s challenging for marketers to deliver this, as they often work with multiple vendors for various channels. Consequently, customers could be bombarded with an email, SMS, WhatsApp message, and a push notification – all conveying the same message. This redundancy can become extremely irritating, leading some customers to opt out of receiving brand messages. Unichannel rectifies this by (a) identifying each customer’s preferred channel and (b) implementing a journey overlay for message delivery. This means that if I receive a push notification and respond to it, no additional messages with the same theme will be sent to me. If I don’t respond within a specified time, an email can be triggered, and so forth with follow-ups on other channels as needed. Unichannel essentially adheres to the “One Customer, One Message” principle. It is designed to fix another commonly broken customer experience – the repetition of identical offers or alerts.
VRM and Near-Zero CAC
Marketer: What is Velvet Rope Marketing, and why is it important?
Vendor: Velvet Rope Marketing (VRM) is a potent strategy where you create a ‘VIP experience’ for your high-value customers based on their customer lifetime value (CLV). By identifying these key customers through data analytics and then treating them to exclusive, personalised experiences, we essentially give them the royal treatment, much like airlines do for business- and first-class passengers with the ‘velvet rope’ and red carpet providing the differentiation.
So, why is this important for B2C/D2C brands? Studies have shown that around 60% of your future revenue and more than 100% of profits will come from these 20% Best customers. (This occurs because the “long tail” customers typically yield losses due to acquisition and servicing expenses.) Yet, surprisingly, many marketers continue to provide a uniform approach to all customers. We’ve all experienced these uniform ‘levelling’ encounters, contributing to the perceived decline of brand loyalty and driving marketers back towards acquisition via adtech platforms in their relentless pursuit of increased revenues. Investing in creating memorable experiences for the Best customers can significantly bolster profitability. In addition, by creating this ‘VRM experience’ (based on ease, exclusivity and access), you are building strong, emotional connections with these key customers, driving higher customer loyalty and reducing the propensity for them to switch to a competitor.
An effective VRM program should incorporate three main components. First, a comprehensive audit of your customer base to gain insights into the buying behavior of existing customers via a systematic transaction review. Second, the dual application of customer lifetime value (CLV) and Best Customer Genome (BCG) to identify your most valuable customers and understand their key attributes. Third, the establishment of a distinct business unit dedicated to delivering tailored experiences for your top customers. This three-pronged approach ensures that VRM is not just a marketing strategy, but an essential business philosophy. While much of the experience provisioning is what you will have to do internally, we can help with calculating the CLV and decoding the BCG so you can segment customers correctly into Best, Rest and Test.
So, think of VRM as a strategic imperative that not only maximises profitability but also fosters stronger customer relationships and sets a high benchmark for customer experience in the market.
Marketer: Your final recommendation was to bring CAC to near-zero? How is that possible?
Vendor: We have already discussed two of the three methods: reactivation and referrals. I will summarise them briefly, and then discuss the third approach.
Reactivation Sequence is a strategy I had mentioned earlier to reduce CAC by revitalising dormant or inactive customers, which is generally less expensive than acquiring new ones. These customers might have become dormant due to a lack of interest, engagement, or brand competition. You already have their contact details, which allows for re-engagement with informative, non-pushy content. Techniques like AMP and Atomic Rewards can aid in reactivating these customers.
Referrals involve leveraging existing customers to bring in new customers through word-of-mouth or social networks, which incurs minimal cost, thus making CAC almost zero. Best customers referring others can be particularly beneficial as they tend to bring in similar high-value customers. Simple techniques, such as adding a referrer field to the sign-up form, asking for referrals in the “Engaging Footer”, and offering micro-incentives, can boost referrals and thus profitability.
The third technique is BCG-influenced acquisition. This is about using data about your Best customers – the Best Customer Genome – to focus on their lookalikes and thus refine targeting of new customers. Often, brands utilise data from all customers, leading to acquisition of the wrong customer type, who often disengage quickly. Profiling tools can help identify potential future best customers within the pool of next customers. If identified early, these customers can be offered superior experiences to foster longer and mutually beneficial relationships.
Taken together, these three ideas can alleviate pressure on acquisition budgets to meet growth targets, especially with CAC increasing by 40-50% annually. Cutting ad spend and redirecting some of it to existing customers can enhance profitability. In fact, you should be thinking of yourself as the Chief Profitability Officer!
Past and Future
Marketer: All these concepts are fascinating: ProfitXL, Inbox Commerce, Adtech-Style Martech, Unistack, Unichannel, VRM, and Near-Zero CAC. Is this what you categorise as Martech 2.0?
Vendor: Exactly! Martech 2.0 aims to extend beyond the original focus of Martech 1.0 on customer retention and engagement, driven by a usage- and user-based pricing model. Instead, it promotes a partnership approach aimed at boosting sales, minimising AdWaste, and maximising profits. Martech 2.0 is predicated on usage and utility, with a focus on performance pricing. You can choose where to apply this. I’d recommend initiating the Adtech-Style Martech journey with Inbox Commerce. Once you see the benefits, you can extend the program to other martech solutions, in partnership with vendors like us. Ultimately, the aim is to redirect AdWaste towards maximising value from existing customers and boosting profits.
Marketer: How can I convince my CEO about Martech 2.0? What metrics can help track progress?
Vendor: Adtech has its Return on Ad Spend (ROAS); Martech needs a similar measure, Return on Martech Spend (ROMS). This can be monitored by tracking sales increases linked to new initiatives and reductions in AdWaste. An even simpler metric is Earned Growth, which quantifies revenue growth from existing customers and new revenues from referrals. It excludes revenue from paid programs. Ultimately, sustainable businesses are built on nurturing existing customers and encouraging referrals.
Marketer: That makes sense. So why isn’t everyone using these methods? Why haven’t we seen this before?
Vendor: Great question. In my opinion, the martech industry missed a step by not capitalising on adtech’s success. Initial vendors focused on consumption (like emails and SMS sent) and predictable platform fees based on Monthly Active Users (MAUs). Also, marketers weren’t paying much attention to martech spend, as they had plentiful funds, which were mostly allocated for new customer acquisition. Only recently has there been a shift towards sustainable, profitable growth. Martech vendors need to appreciate the power of considering brand spending as Cost of Goods Sold (COGS). It may initially seem risky due to revenue uncertainty, but in the long run, this approach opens up “infinite budgets,” much like adtech. This balance shift can expand the Total Addressable Market (TAM) for the martech ecosystem. But this requires a shift from predictable Monthly Recurring Revenue (MRR) from SaaS sales to a “progency” (product-led agency) model with a service component and outcome accountability.
Marketer: This does indeed sound like a “transformation,” not only for brands but also for martech companies.
Vendor: Absolutely. To illustrate, adtech spending is currently $450 billion, with about half – $225 billion – deemed AdWaste. This figure is 4.5 times larger than the $50 billion martech industry. If we divide this $225 billion AdWaste into thirds: a third remains waste, a third increases brand profits, and a third rewards martech platforms for their contributions. Each third equates to $75 billion. This division could increase brand valuation by a trillion dollars (assuming a 15X earnings multiple) and grow the TAM for martech vendors by 150%. This is indeed a transformation that benefits both brands and martech vendors.
Marketer: This has been an awesome conversation. Do you have references that explain many of the ideas we have discussed? This way, I can prepare myself for the meeting with my CEO to get the necessary approvals.
Vendor: Absolutely. Here are 10 essays which will give you a better understanding of the ideas I have explained.
- ProfitXL: Supersize Profits with the SHUVAM Framework
- PxL: Transforming eCommerce P&Ls
- The Coming of Inbox Commerce
- Email Shops can Transform eCommerce
- Email 2.0: The Rise of the New Super App
- Martech 2.0: Adtech-Style Performance Pricing Transformation
- Digital Marketing and its Discontents and Disruptions
- AMP’s Magic: Coming Soon to Your Email Inbox
- Loyalty 2.0: How Brands can Tokenise Customer Attention and Data
- Best Customers and Velvet Rope Marketing
Marketer: Thanks. Here’s to a prosperous and profitable future! For both of us.
Vendor: Thank you. I look forward to partnering with you to pioneer the Profitability Era of Marketing. And I have a final surprise for you!
Marketer: What more surprises do you have in store for me now?!
Vendor: Just one final one, which I think you will like. I’ve prepared a memo for you to present to your CEO, outlining the compelling case for transitioning to Martech 2.0, promising exponential and sustainable profitable growth. Here it is.
Subject: Pioneering A New Era of Profitable Growth: Adopting Martech 2.0
Our marketing landscape is evolving, with Martech 2.0 heralding significant enhancements to our customer experience, marketing effectiveness, and profitability. I’ve highlighted some crucial aspects of this transformation:
- Marketing’s Shift to Profitability: The time has come to consider marketing not merely as a revenue driver but as a catalyst for business profitability. Our focus on continuous acquisition has led to excessive spending; we need a new, profitable growth strategy.
- Finding and Fixing the Profit Killers: Our profits are being undermined by three primary factors: disjointed customer experiences on our website and app due to siloed data and inefficient search, the underperformance of our push channels in engaging existing customers with the brand’s properties, and an over-reliance on new customer acquisition spending resulting in escalating CAC. (You have repeatedly expressed concerns on the rising adtech budget.)
- Embracing Martech 2.0: My proposed strategy involves repurposing the estimated 50% AdWaste from our advertising budget. The idea is to align martech vendors with our growth objectives, incentivising them based on performance, linking the marketing costs with revenue growth. Think of marketing as cost of goods sold – we may spend more as we generate more revenue but given that our SG&A costs will stay the same, we will boost profitability.
- ProfitXL (PxL) Initiative: Our new focus is sustainable, profitable growth. This PxL approach aims to supersize profits and transform our P&L, with the next six points serving as its key pillars.
- Innovating with Inbox Commerce: A critical innovation of Martech 2.0, Inbox Commerce streamlines the purchasing process via push messages, primarily emails. It removes ‘funnel friction’ and targets revenue growth from existing customers. Watch out for terms like Email Shops, Reactivation Sequence, Engaging Footers, and our new customer segmentation model: Best, Rest, Test, Left, and Fresh. (You would have received an email in your personal inbox: go ahead and shop, and you will never have to leave the inbox! Magical, isn’t it?!)
- Adopting Adtech-Style Performance Pricing: Emulating adtech’s successful aspects, we’ll move towards performance-based pricing for revenue growth from existing customers, ensuring more accountable RoI.
- Integrating with Unistack: An integrated marketing platform would offer a holistic view of our customers, boosting efficiency and fostering better customer relationships. Remember your ask for a unified customer view? This will get us there.
- Optimising Communications with Unichannel: By identifying customers’ preferred channels, we can reduce redundant messaging and enhance the overall customer experience. (Hopefully, this will get you less complaints from your peers about repeated messaging!)
- Velvet Rope Marketing (VRM) for Customer Segmentation: By concentrating on the top fraction of profitable customers, VRM offers tailored experiences to foster loyalty, reducing churn, and maximising lifetime value. (You have always been wanting us to think about how airlines, banks and hotels deliver exceptional experiences for their Best customers. This will do exactly that.)
- Minimising Customer Acquisition Cost (CAC): Martech 2.0 offers strategies for achieving near-zero CAC through reactivation of dormant customers, customer referrals, and targeted acquisition based on our Best customers’ profiles. (This way, we don’t have to begin our Monday morning reviews with discussing the industry’s rising CAC problem!)
- Adopting Earned Growth as North Star Metric: We will measure growth not just through revenue, which can be artificially boosted by higher spending on new customer acquisition, but via existing customers and their referrals. (As you keep reminding us: make sure our existing customers come back for more and get their friends.)
Transitioning to Martech 2.0 will transform our profitability and customer experience. Let’s work towards beautifying every broken profit-killing customer experience, marching towards becoming a “profipoly”. As your new Chief Profitability Officer, I look forward to navigating this journey with you.
Marketer: This is the best surprise of them all! I’ll get back to you shortly.