Published December 11-21, 2021
There are 3 transformations happening that will have an impact on how marketers use technology to build relationships with their customers to drive revenue growth and maximise lifetime value: the shift from new customer acquisition at all costs via spending on digital ad platforms to a focus on existing customer retention, the switch from point solutions to full-stack solutions as marketers demand a unified customer view, and a consolidation amongst the thousands of martech companies. I have covered these three broad transitions that are underway in my previous three essays:
- The Coming Martech Era: Driving Exponential Forever Profitable Growth
- Martech’s Magicians: Microns, Micronbox and µniverse
- The Subscriptions Future: Customer Retention Forever
In the coming martech era, there is a fourth shift that will play out. The complexity of martech, the costs of integration, the scale of the data being generated with the tracking of every customer action, the limitations of internal marketing teams – all will necessitate a new kind of entity to deliver the retention, reactivation and referral outcomes that brands need.
Marketers end up thinking of messages, segments, campaigns, journeys, churn prediction, and analytics. What they need to focus on is something much simpler: how to provide unmatched experiences to the Best customers to they maximise spending with the brand, how to transition the Rest customers to becoming tomorrow’s Best customers, how to cut costs while dealing with the Test customers, and how to acquire the right Next customers based on insights from the Best customers.
This mindset shift will need a martech agency – what I call “progency”. This product-led agency will combine content and creative skill sets with number-crunching and software capabilities to build on top of a proprietary full-stack martech platform to deliver the outcomes marketers want with a performance (success-based) model. The progency will help marketing teams outsource the outcomes they want – just like is being done with adtech agencies that generate leads, app installs or new customers and are paid based on results.
The progency will be different because for the first time an agency will build solutions on top of its own product. In the past, agencies have not focused on having their own internal products. Adtech agencies have used products provided by Google and Facebook, and then overlaid their creative and analytical skills to deliver results. The progency will be tech-first, owning a martech platform. Ownership is important because only the developers will fully understand the power of what their platform is capable of. This is what will provide a sustainable competitive advantage to the progency.
Theodore Levitt famously said, “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole.” The progency is about providing the holes that marketers want.
The progency is an agency. Advertising agencies have been central to marketing and have a long history.
ClearCode writes: “An advertising agency, often referred to as a creative agency, is a company providing services associated with creating, planning, and managing advertising campaigns, but may also handle other forms of promotion and marketing for its clients. Advertising agencies are generally independent, external companies working for their clients, which can include businesses, international corporations, non-profit organizations, and other agencies. Traditionally, brands hired ad agencies to produce television commercials and run print campaigns in magazines, newspapers, and on billboards. Today, many agencies create, run, and manage online campaigns using an array of advertising and marketing technologies. These types of agencies are also known as interactive, media, or digital agencies.”
Wikipedia adds: “An ad agency is generally independent of the client; it may be an internal department or agency that provides an outside point of view to the effort of selling the client’s products or services, or an outside firm. An agency can also handle overall marketing and branding strategies promotions for its clients, which may include sales as well.”
ReleaseMyAd offers the early history: “The first agency dated back as far as 1786 when William Taylor opened his office in London, today acknowledged as the first advertising agency in history. However, while the UK business is considered the forerunner of advertising agencies in Europe, it was Volney B. Palmer who took the idea across the ocean. In 1840 Palmer opened the first agency in America. Adland: A Global History of Advertising cites Palmer describing the services he provided using the term “agent”: “the duly authorized agent of most of the best newspapers of all the cities and provincial towns in the United States and Canada, for which he is daily receiving advertisements and subscriptions.””
Wikipedia elaborates: “All advertising agencies are called that because they are acting as agents for their principals which were the media. They were then, and are now, paid by the media to sell advertising space to clients. Originally, in the 18th century, and the first half of the 19th, advertising agencies made all of their income from commissions paid by the media for selling space to the client. Although it is still the case that the majority of their income comes from the media, in the middle of the 19th century, agencies began to offer additional services which they sold directly to the client. Such services can include writing the text of the advertisement.”
More from ClearCode: “For a long time, agencies were the go-to businesses for all offline advertising efforts. However, the introduction of the Internet was a complete game changer for both brands and publishers. AdTech companies started disrupting and threatening the way ad agencies operated and by offering completely new opportunities, shifted the balance of power away from agencies. The rise of the Internet and online advertising technologies have given agencies access to unparallelled amounts of data about consumers and their online behavior. The resulting diversification of marketing options has become the main challenge for brands, influencing what they expect from agencies today. Because digital marketing creates vast amounts of information, new tools are needed to make sense of and leverage the data.”
Most large agencies today offer a full spectrum of services from the traditional branding to the digital era performance marketing solutions.
With the internet, new marketing opportunities opened. From the early world of banner ads to search engine marketing with the rise of Google, from animated GIFs in the early days to targeted video ads on platforms like YouTube, from PCs to mobiles – the digital agency’s ambit has grown through the past 25 years. Pricing models too have evolved – from CPM (cost per thousand) to CPC (cost per click) to CPA (cost per action). The availability of data has made digital marketing an art and a science, with Google and Facebook offering finely honed segments for targeting. The past decade has seen massive growth in revenues (and valuations) for Google and Facebook, as they rode the wave of brands hungry for new customers. The pandemic accelerated every digital trend and the growth of the Google-Facebook duopoly.
With FOMO (fear of missing out) engulfing every B2C and D2C brand, this has now become a spending war to acquire every possible digital customer before someone else does it. Easy investor money has fuelled the spiralling spends on Google and Facebook to the extent that marketing departments have become their collection agents. Left to themselves, marketers would not have been able to make optimal use of the features provided by the adtech platforms. The digital marketing agencies made it very easy: decide the budget for customer acquisition, hand it over to the agencies who then provide the desired outcomes. They have been the secret behind the rise of adtech. If martech has to become front and centre, it too will need a similar agency construct.
Ads made (too) Easy
When I was running IndiaWorld in the late 1990s, Samachar was our most popular site, followed by Khoj, Khel and Bawarchi. Our revenue model was ads. While one approach was to sell banners based on time, I quickly realised that it was quite inefficient because the same ads were shown to a repeat customer base. I then decided to build a software solution to rotate ads and price based on exposure (CPM, or cost per thousand). I called the solution “Khojnet” – my own early version of an ad network software that ran across all the IndiaWorld sites. This change in the way we served ads got us more advertisers and drove higher revenue from the same traffic.
Khojnet was built out of necessity. In those days, we could be thought of as an early version of a progency: the product was Khojnet, and we were selling space like an agency. Khojnet gave me an advantage over others who sold banners based on time. It was one of the secrets to making IndiaWorld profitable and later, a “proficorn”.
Of course, over time, the adtech industry evolved very rapidly. Performance marketing is the norm now and programmatic ads rule the roost.
As BigCommerce explains: “Performance Marketing is a combination of paid advertising and brand marketing put together, but only paid out once the completed desired action takes place. This win-win marketing opportunity for a retailer or “merchant” and affiliate or “publisher” allows both parties to truly target campaigns in a strategic, high ROI way, all based on performance. By paying the affiliate or publisher when a specific action is completed, a merchant can feel confident that their money is being well spent since they are already converting their target audience before they pay for the transaction.”
Digital Marketing Institute writes: “Programmatic ad buying is the use of software to buy digital advertising. While the traditional method includes requests for proposals, tenders, quotes, and negotiation, programmatic buying uses algorithmic software to buy and sell online display space. A sophisticated way to place advertising, it uses traffic data and online display targeting to drive impressions at scale which results in a better ROI for marketers.”
Performance marketing ensured that the cost of advertising moved from becoming an expense to a cost of sale. As long as a business was getting a paying new customer, it became easy to justify the cost of advertising. Programmatic provided the extra impetus and brought in more spending.
As with all good things, this has gotten overdone. What marketers forget is that their own customers are also constantly being targeted by competitors to switch. So the bucket is leaky – many of the new customers being acquired are actually reacquisitions of churned customers, and some of the new customers are also less valuable. Marketers have trapped themselves into a digital arms race, where the only winners are Google and Facebook, with some crumbs for the agencies. This is what I call the “doom loop” of ad spending.
Martech Agency – 1
There is only one way out of the spiralling costs of ad spending. It is obvious, and yet few marketers practice it because it is also hard work. The solution is to focus on existing customers and drive retention, convert reacquisition spends into reactivation at a fraction of the cost, and ensure referrals to bring down cost of new acquisitions. My estimate is that a third of the adtech budgets is being wasted – if these are allocated towards the 3 Rs of martech (retention, reactivation, referrals), brands will create a path to profitable growth. The alternative is a continuing dependence on investor capital poured into a leaky adtech bucket.
This is going to be the biggest budgetary shift in marketing in the years to come: a third of adtech budgets can create a $100 billion opportunity for martech spending. But this will not happen without the rise of the martech agency – just as the growth in adtech spending would have happened without the assistance provided by the digital agencies.
Adtech required external intervention because it was about dealing with prospects – future customers. These customers were elsewhere and needed to be attracted to the brand. Hence, the spending needed to be where these customers were (everywhere except the brand’s own properties) for which the combination of the adtech platforms (Google and Facebook) and agencies were needed.
Martech is different. It is about the brand’s own customers. Brands have enough information about them to create a hotline via push messaging in the form of email, SMS and notifications to attract them to their own app and website. In that sense, it is an “internal” problem – the levers of control lie within the marketing department. Over the past few years, martech tools have emerged to help with exactly this – campaign management, customer segmentation, journey orchestration, marketing analytics, and much more. The problem for marketers has been two-fold: internal marketing teams do not have all the talent and skills to make the best use of these martech platforms with the result that they use only a fraction of the capabilities, and top management is still mesmerised with new acquisition numbers leading to 90% of budgets getting spent on adtech, and existing customers are largely left orphaned.
That is the opening and opportunity for a martech agency. Such an agency would help the marketing department the way the adtech agencies do: make it easy to outsource, work on specific KPIs, and link payments to performance. Just as marketers learnt to work with adtech agencies and rarely do campaigns internally, they will need to build relationships with martech agencies. CEOs and Boards of companies will need to bless these transitions: from adtech to martech, and from internal teams to an outsourced martech agency. The businesses which manage this shift successfully are the ones which will lay the foundation for exponential forever profitable growth.
Martech Agency – 2
In a recent series on the coming martech era, I wrote about the progency:
The next generation of agencies will be built atop proprietary digital experience platforms and will focus on customer retention, growth and reactivation. This new agency is what I call “progency” – product-led agency. Like the adtech agencies, it will charge based on performance. This will ensure measurement and accountability – two key tenets for outsourcing core activities.
The customer journey involves multiple stages: new customer acquisition (lead generation, onboarding), retention and cross-sell to ensure growth, reactivation of dormant customers, and driving referrals. The progency is ideal for focusing first on reactivation followed by referrals, and then on using first-party data to optimise new customer acquisition.
I also described the various elements that needed to come together to construct a progency: proprietary platform, multiple skills and success-based pricing. I identified the first use cases that a progency could address: reactivation, referrals and (targeted) new acquisition. I also gave the example of Red Ventures which had built a very successful model for new customer acquisition.
I ended by saying: “The coming martech era needs a new type of agency to make the best use of the Digital Experience Platform (DXP) and complement the marketer’s focus on the daily drive towards more transactions. By working at the edges for reactivation of the “lossy tail” (Test customers) and focusing on referrals and smarter new acquisition, the progency can be a very powerful partner to the marketing department in the quest for exponential forever profitable growth.”
There are many questions still left to address – and for these, we will need to switch tracks to look at the view of the progency from the lens of the creators: Who will build the progencies? How will a progency persuade a brand to use it? How would the use cases work – for example, how would a progency drive reactivation better than the brand’s own marketing team? What would be the business model? How would the progency interface with the internal marketing teams?
The adtech agencies ended up being the erstwhile ad agencies who learnt the tricks of digital and did acquisitions. They combined their creative and content skills combined with some analytical and tech skills to deliver the outcomes their customers wanted. I don’t think the adtech agencies will make the transition to becoming martech agencies.
A martech agency will need to be built atop a martech platform. A martech platform is much more complex; it comprises multiple components including a CDP (customer data platform), analytics, automation, personalisation, product experience, and multi-channel communications. It also needs a powerful AI engine and APIs to connect with other point solutions. Here is an example of the Netcore Cloud stack:
A martech agency thus has three choices: it can buy an existing full stack, it can stitch it together from best-of-breed solutions, or an existing martech full stack provider can decide to leverage its product and become an agency. The first two options are not easy: the complexity of martech solutions means that agencies will face the same limitations that brands face in utilising the full power of the platforms. A deep understanding of the martech full stack is a critical success factor for such an agency. Therefore, the ideal candidate for creating the martech agency will be the martech stack builder itself.
The question of course is why would a platform provider get into the agency business? The simple answer is the market size and opportunity. Martech has thousands of companies providing point solutions, making the space hyper-competitive. There will only be a handful of winners. The tools and solutions market will probably be $10 billion dollars. In contrast, the outcomes market is 10 times larger — $100 billion dollars. (This number comes from assuming a third of the adtech budgets can potentially shift to martech.)
Smart martech platform providers will realise this opportunity and work to grow their customer success teams into a full-fledged agency. Instead of just promising KPIs, they will agree to be compensated on performance. No one knows the power of the platforms better than the ones who have created it, so they are best positioned to also deliver the results in the most efficient manner. (This is different from adtech where Google and Facebook work like black boxes, and there is a level playing field for all adtech agencies who need to build their solutions on top.)
It will be each easier for a tech entity to recruit creative talent, than for a creative agency to attract tech talent. The martech agencies of the future will thus emerge from the martech platform makers, and hence the term “progency” – product-led agency.
The progency can be seen as the services arm of the martech companies. But it is not a classical people-led services business. The progency is actually a very scalable tech powerhouse with the full stack martech platform as the machine. Brands can either buy the machine itself (in effect, rent a version of it, since it’s all delivered from the cloud) or hire the machine developer to deliver the outcomes. It is back to the drill-or-hole question.
Martech solutions sellers today focus on the features as the differentiators. Faster segmentation! More delivery of push notifications! Better analytics! Prettier dashboards! And so on it goes. But what is the job that marketers really want done? And do they have the right machine operators?
What marketers want (or should want) is maximising customer lifetime value. It means identifying the category’s most profitable customers, acquiring them, retaining them forever, and getting them to refer their family and friends to create an unbeatable profits flywheel – thus creating a “profipoly” (profits monopoly). But in doing this, they get lost in the trees of various point solutions that they buy and are forced to integrate. They then have to hire software engineers – never an easy exercise. And slowly, it comes down to the sub-optimal basics: just do the campaign and send out the emails or notifications. And spend more on new customer acquisition to cover the gap.
This is where the progency can come in. Its pitch is simple: we will deliver the outcomes you need, we will get the job done for you. We have the machine and the operators. No one knows the machine better than we do. We constantly make the machine better. You don’t need to worry how it works. (No marketer knows how the targeting machines of Google and Facebook work.) You can of course buy the drill, but we are here to give you the hole that you really desire. You pay based on the performance, so we are on the same side.
The progency pitch can be even sharper by focusing on the most important aspects of the marketer’s goal of maximising lifetime value: we will identify your Best customers so you can focus on creating a separate business unit to provide them differentiated experiences, we will help move the Rest customers to become tomorrow’s Best customers, we will reduce costs of dealing with the Test customers (long tail), and we will help provide you with the right information so that you can acquire Next customers who are likely to be more profitable.
No one is making this pitch today to marketers, and that’s where the progency opportunity lies.
Let us take a concrete example of how a progency would operate.
One of the biggest challenges a marketer faces is that of dormancy – acquired customers go inactive after a certain time. I estimate this to be about a third to half of a company’s customer base. These are customers the company probably paid good money to acquire – either via branding campaigns or performance marketing. If they do not become sticky, it is a big loss for a brand.
As I wrote earlier: “Brands have spent good and big money acquiring these customers but for various reasons that relationship is no longer active. Instead of a blossoming friendship, brands and customers have become strangers to each other. Both have gone their own separate ways. Is there a way to bring them back together and rekindle the joy that they had once experienced however briefly? … Reactivation hasn’t been looked at seriously since it falls between the two stools of acquisition and engagement. The adtech team wants to acquire new customers – which is also what the top management would like to see and show. The martech team wants to drive engagement and retention, and ignores customers who were once new but are now inactive. No one is responsible for reactivation. This is the whitespace for marketers – it can give faster success at lower spends. (But which marketer wants to lower their spending budget?!)”
For a marketer, the priorities tend to be new customer acquisition (because that is what everyone else is doing – it is like a land grab) and engagement with the active customer base. In this, trying to reactivate dormant customers is among the top priorities. This is exactly the problem for a progency.
Marketers can provideemail IDs and mobile numbers of the inactive customer base to the progency on a performance-based success fee: get paid 50% of the cost of new acquisition for every reactivated customer. It is a win-win for both sides. For a marketer, this is better than going through the Google-Facebook route where the acquisition costs are spiralling. Reactivation at half the cost of reacquisition should be a no-brainer decision. For the progency, they have a free hand to run a parallel program that doesn’t need daily sign-offs and discussions with the brand’s marketing teams.
For a progency, the way to go about this would be to start with push messages to ‘awaken’ the user. This is where the trio of Ems, AMP and microns can create the opening. If dormant users still have the app installed, push notifications can be added to the mix. The reactivation goal could be something as simple as a specified number of actions (opens, clicks, site visits, app opens) in a 30-day period or even a transaction. The progency has its martech platform and messaging capabilities to deliver the outcomes. It will need to move the dormant customer along the path of becoming an opener (of push messages), then a clicker (to go to the website or app), and eventually a transactor.
Reactivation is thus a “blue ocean” opportunity: it isn’t being done today. Marketers are not interested given their other priorities, and no agencies who just have creative skills can deliver the outcomes needed. The progency is the only way to tap into this large opportunity.
Other Use Cases
Besides reactivation, there are at least three other use cases which are equally compelling.
Retention for Branding: B2C and D2C spend a lot of money on branding – but all of it is targeted at acquiring new customers. There is almost no activity post acquisition to imprint the brand in the minds of existing customers. This strikes me as odd because unless it is a prepaid multi-year subscription business, I as a customer am being continuously targeted with brand messages from competitors and thus could easily be lured away. Acquisition does not mean lifetime loyalty, and retention does not mean maximisation of revenues. Brands have to work even after acquisition to build deep, meaningful relationships with their customers, and very few brands actually do it. This is where the progency comes in. It can open up a new channel of engagement with customers with a focus not on transactions, but on improving the mental availability of the brand. The “performance” can be measured via a “Hooked score” – the number of actions that a customer does over a 30-day period.
Referrals: Another area is to leverage happy customers to acquire new ones through their friends and family network. This can again be a parallel progency program since very few brands focus on referrals. The general perception is that it is easy to game the referral codes and thus brands tend to stay away. But there are ways to do referrals right. It is a measurable parameter, and thus can be outsourced to a progency.
Targeted New Acquisition: A progency can also help improve the quality of new acquisition. By analysing the existing customer data, it can help provide inputs on which new customer to acquire. This marriage between martech and adtech is a rarity today, but is critical if brands want to optimise acquisition spends. A progency can be incentivised based on the lifetime spend of the customer – almost like how a multi-level marketing program works. This aligns the progency’s incentives to not just drive one-off transactions, but ensure maximisation of the customer’s spending potential with the brand.
What I have not suggested as a progency activity is what I think should be the core function of a marketing department: customer retention and engagement. For this, the marketing department should focus on the top 20% Best customers and 30% Rest customers. There should be two different teams for each of these segments. Everything else can be outsourced to a progency. The good thing is that the work of a progency can run in parallel and does not impact the core marketing functions. It in fact augments the capacity by freeing up internal resources to do what they do best: imagining and crafting great experiences for the loyal customer base.
The progency is the missing link in today’s martech ecosystem. Martech platform providers need to expand their offerings to create a performance-based business unit which can interface with marketing departments to provide the solutions and outcomes they need. Marketing managers need to go beyond trying to buy every new point solution and instead focus on the KPIs the business needs to drive profitable growth. Only when the two meet will brands see success and the martech solution providers benefit from an addressable market that is 10 times larger.
Once upon a time, all IT used to be done in-house by companies. Then came the era of outsourcing which saw the rise of the global IT services giants. A similar story will play out in marketing in the years to come. The coming martech era will reward those who use the progency model to take a hatchet to the rising adtech costs and thus put their organisations on a sustainable path of profitable growth.
The progency is a natural extension of the “as-a-service” model. Instead of just selling martech platforms which are fractionally used, a new business model can be created with the same machine to generate many times more revenue by ensuring marketers succeed. What marketers need is “Martech-as-a-Service” – what is happening today is that martech companies provide a confusing array of point solutions that make it difficult for marketers to drive the outcomes they want. Pioneering progency companies thus have a great opportunity with a pivot: instead of just selling the product, focus on delivering measurable results.
I recently met a CEO of a company who made this point come alive to me. He said, “Today we are paying Rs 100 for a collection of products. I do not want to discuss and negotiate whether you will charge Rs 92 or 95. What I want you to do is take ownership and bring my overall cost down to Rs 70. What we should be discussing then is how we split the Rs 30.” As I reflected on his comments after the meeting, I realised that he was nudging me towards a progency-like model (even though he did not mention it in so many words.) He was advocating a partnership where we work together and benefit jointly from the upside. I may get a sale for Rs 95 now, but I will always be at risk because tomorrow someone can quote Rs 90 – it’s a downward spiral in a competitive and semi-commodity marketplace.
As I thought about that conversation, I came up with a better possible pitch that I should be considering. “I will help you to not only cut Rs 30 of your costs and but take your revenues up by Rs 50 with the progency model. For this, we will need to work as partners – you will need to trust me with your data, customers and campaigns. Are you ready for this? Because if you agree, it will help drive exponential forever profitable growth for you.”
This is the mindset change that is needed on both sides – from the brand and the martech platform provider (and soon-to-be progency). And if both can make this shift, a wonderful new era awaits!