Will SaaS Companies Build Internal Marketing Agencies?

By | January 9, 2013
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Building BlocksAs agency professionals, we’re bombarded with technologies that help us do our jobs better—think HubSpot, Radian6, Act-On and Eloqua, as examples. These software-as-a-service (SaaS) companies have drastically shaped what is possible in marketing today, giving us the ability to become more targeted and personalized in our outreach, track results at both campaign and tactical levels, and gather and analyze a wealth of data on prospective buyers.

They are the driving force behind change velocity, or the continual rate of change, in the industry. New tech innovations open the door to marketing opportunities that were unheard of in the past, demand shifts in marketer skill sets and push us all forward.

Fast-Forwarding Change Velocity

However, as SaaS vendors push the envelope in terms of what is possible in marketing today, corporate marketers and agency professionals often struggle to keep up. The marketing talent gap is real.

It’s becoming nearly impossible to keep training and academic programs up to snuff when industry developments and transformations could happen over night—much less in the blink of an eye. Just consider all the capabilities that became possible when HubSpot released HubSpot3 in August.

Need to Stop Churn

Pair this gap in marketing talent with SaaS companies' need to reduce churn, and you’ve got an interesting conundrum on your hands. Churn is a very important metric for SaaS companies, as it measures the number of customers that stop using the software, for whatever reason.

As David Skok (@bostonvc) points out in Why Churn is SO Critical to Success in SaaS, churn rate grows in importance as a SaaS provider’s customer base increases. Skok explains that in the early going when the customer base is small, a 2.5 percent churn rate only has a minimal impact on monthly recurring revenue (MRR), as loses can more readily be recouped via new sales. However, this same churn rate on a large customer base is significant and much harder to replace, having a greater impact on bottom-line results.

At a bare minimum, SaaS companies need customers to stick around at least until they are able to regain what was spent to acquire that customer in monthly subscriptions fees.

Because of the correlation between churn and MRR, as well as an organization’s ability to grow, churn is a primary metric in SaaS valuations—along with recurring revenue, cash flow, recurring revenue growth and capital efficiency.

So how do SaaS companies reduce churn? They ensure that customers are wildly successful with their products.

The Talent Disparity

Unfortunately, for SaaS providers, not all customers can successfully use their software without assistance. I believe this is much more true in the marketing-services industry in which disruption and technology innovation is happening so rapidly. As a result, education, consulting and customer service become critical to retaining customers.

In addition to free content resources, a handful of top providers have found success with agency-match programs that offer ongoing consulting to their customers. The ultimate goal of these programs is to help the user maximize the technology’s value. For example, HubSpot has sent $8 million dollars worth of marketing-services work to its agency partners.

The issue here is that SaaS companies often have to invest heavily in the training and development of their partners, staffing complete teams to keep those individuals up to date on technology updates and marketing best practices.

What’s Stopping Them From Internalizing?

At some level, SaaS companies typically offer consulting or managed-service offerings—either out of necessity to improve performance or because customers demand more advanced product expertise. We refer to these providers as softservers in the agency ecosystem. Check out example services from HubSpot, Eloqua and Radian6.

That said, many are just dipping their toes into professional services. So, what’s stopping them from building all-out internal agencies? As Paul Roetzer (@paulroetzer) calls out in The Marketing Agency Blueprint, service-based businesses get lower valuations from investors. 

As Rand Fishkin (@randfish) expands in SEOmoz’s Venture Capital Process, “You rarely ever see venture or angel capital flowing into consulting firms. The margins on a consulting business hover between 40-55%. Margins in software get closer to 80%+ and scale isn't proportionally tied to cost.”

For this reason alone, SaaS providers are likely to offer more opportunities for marketing agencies than competition. That said, in many cases, they have the talent, knowledge, finances, technical know-how and intrinsic insight into the customer (read: data) that they could move into the marketing-services industry more heavily, if desired.

Do you think they’ll take that leap? If so, what affect will that have on the agency ecosystem? I would love opinions from both agency professionals and technology providers, so leave yours below!

Image Source: Holger Zscheyge