Today at SMB Digital Marketing, BIA/Kelsey Entrepreneur in Residence Warren Kay led a panel of heavy hitters to bat around operational and financial strategies for local media companies and early stage startups.
Matt Booth, CEO, YellowBot
Mike Dodd, Partner, Austin Ventures
Gordon Henry, VP / GM Small Business Services, Deluxe Corp
“How do you balance profits and growth,” posed Kay to open the session. “The challenge of acquisition and fragmentation of your customer base, and retaining those customers is incredible.”
The consensus of the panel was that software and infrastructure plays will be the future of local. They have better unit economics and more importantly, high customer retention and recurring revenue.
This is tied closely to the SMB Operating System concept we’ve been writing about a lot. Another way to look at it is to riff on Marc Andreesen’s famous claim that “software will eat the world.” Now it’s eating local.
Despite the emphasis on shiny new technology, there still needs to be a focus on what’s going to make money for investors. The businesses admired by Henry in the local space include those that can achieve high margins through software and Saas based products with little service components.
These include Valueclick and DemandForce, the latter which was sold for a huge multiple to Intuit. Endurace is another one he mentioned which has achieved high EBIDTA through an emphasis on software and higher margins
“The challenge is when you involve lots of humans and high touch sales,” said Henry. “Businesses in local that are reselling are facing a lot of margin pressure.”
Faced with the question of value in a company like Marketo that just went public but isn’t yet profitable, Dodd posits that it deserves to.
“If you are a SaaS offering like Marketo burn as much as you can,” he said. That might sound weird but it’s true for the type of business they’re in. When you’re in that market with a product with high gross margin and high retention rates, you can afford to spend a lot to acquire that customer upfront.”
“They’re focused on getting coverage and mopping up as many customers as possible. Customers get locked in for high retention and there’s also a lot of upsell potential and higher margins. When those factors are in place, you can burn through capital and you’ll reach profitability over time because the lifetime of customer value is high.”
Local conversely is faced with more challenged margins and retention. Daily deals for example has high churn and the unit economics aren’t as good. Lots of venture money hasn’t gone into local startups for that reason.
Valpak is franchise based with a committed sales force but there is margin pressure that requires devising solutions that works for ValPak, advertisers and the Franchised media sales. That’s all about achieving scale and “the hard stuff.”
“It’s the hand to hand combat,” says Vivio, “The conversation over the hood of a pickup truck. I admire the companies that can get to that type of customer with digital offerings. For us, we’re getting there on our longstanding relationships and trust in 40 years of business.
“The challenge is scale. You have to do the right thing by the small business and do it in a way that will pay,” said Vivio “Lots of these things are difficult for SMBs to understand. They have to be explained by a human but done in a way that is profitable.”
Posed with a recent Paul Graham quote that in order to be considered a startup, your growth rate should be 7-10 percent per week, Booth agrees that growth is important, but so is customer retention.
“The expectations you often see with investors is that you’re able to at least double your business year-over-year for the foreseeable future,” he said “But they also want to see recurring revenue.”
Lots of players in local are either selling marketing or infrastructure and operational products. The difference in customer retention is huge when you consider the operational players are locked in with stickier relationships (the Intuits and Squares of the world). SMB advertising conversely has famously high churn to the tune of the 40% range.
“If you’re not on the infrastructure side and you’re just on the advertiser side alone without a large legacy sales force, you’re going to find it very difficult to scale,” said Booth.