Web.com agreed last Thursday to acquire Yodle, an SMB marketing solutions provider (and my former employer) for $342 million. Web.com is best known for the domain registration and website hosting companies its acquired since 2010, namely Register.com and Network Solutions. While the acquisition is likely welcome news for Yodle’s backers and Web.com’s shareholders, the resounding message for SMB performance marketing vendors is one of caution.
As Local Onliner’s Peter Krasilovsky pointed out on Friday, Yodle was rumored to be eyeing more than $1 billion in an IPO just 2 years ago. As far back as early 2013, before I left the company, the hallways were filled with trickled-down rumors of an imminent IPO filing. That filing arrived in July of 2014 — but it failed to generate enough investor interest to move forward and was withdrawn.
So what happened to the rumored $1-billion-dollar company that had cracked the mystery of scalable SMB performance marketing?
It turns out that Yodle had, indeed, cracked the nut on acquiring SMB customers. The company grew from 10,000 customers in January 2011 to more than 58,000 in January of this year. While the growth rate slowed over the past 2 years, it’s no small feat to have added 580% more customers in a 5 year period. I saw the growth firsthand—the sales team in Yodle’s Austin office grew more than 400% during my 2 years at the company.
With this steady stream of new customers, Yodle’s weak IPO investor interest had little to do customer acquisition. While many have pointed to the company’s high CAC (Customer Acquisition Cost) as the root of its valuation challenges, the reality is that CAC is only high if you don’t retain customers for long enough to pay back that cost with a solid LTV (Lifetime Value). The real problem facing large performance marketing vendors like Yodle is retention, or as Sharon Rowlands, CEO of competitor ReachLocal, phrased it, “massive churn”.
What do we know about Yodle’s retention rate?
The company’s S-1 filing in 2014 was cryptic about its true retention rate, instead opting to release a “tenured customer” retention rate that only included customers who remained around for a full year. (If you’re curious, this tenured customer retention rate was averaging 97.5% for the first 3 months of 2014.) The reality is that the vast majority of customers Yodle acquires do not stay for a full year. With no decent LTV to write home about, CAC is always going to seem too high.
Looking around at other players in this space, Yodle is not alone. Indeed, most major companies selling performance marketing packages to SMBs are locked in a constant struggle to survive. YP, Yelp, ReachLocal, Angie’s List, Groupon, Dex Media are just a few on the list. Retention is the main challenge for all.
It’s worth noting that there are a number of companies having success serving the marketing needs of SMBs. Companies like HubSpot, GoDaddy, Vistaprint, Constant Contact, Mailchimp, and Yodle’s new parent Web.com are all doing well.
The main differentiator here is that the successful companies in the space primarily sell technologies that solve a specific marketing problem. Most of them do it in a straightforward way and, perhaps not coincidentally, acquire the majority of their customers through inbound, self-serve channels. Most do not primarily provide performance marketing solutions.
What does all this mean for those of us who want to scale our success in marketing services for SMBs?
- Build companies firmly rooted in technology that solves specific SMB marketing problems.
- Sell your services in the most straightforward way possible.
- Keep your customers happy.
Mark Sullivan is director of partnerships for CallRail, a marketing analytics company used by more than 30,000 businesses in the U.S. and Canada. At CallRail he helps marketing agencies get the most out of call tracking data through advanced advertising analytics and software integrations. He frequently speaks at marketing technology conferences and writes for industry publications about trends in local search advertising. He can be reached via Twitter.