Right on cue, this week Salesforce.com has emphatically confirmed that yes, email does matter to the tune of $2.5 billion.
The acquisition of ExactTarget plugs what had been a gaping hole in the Salesforce Marketing Cloud, as CRM expert Paul Greenberg expertly describes in his commentary on the deal. It puts pressure now on other vendors to consider similar deals; or at the very least, close partnerships to compete.
Perhaps even more importantly for Salesforce.com itself, the deal helps ensure its growth does not flag in the face of renewal challenges in its more established lines of business. More on that line of thinking below. In fact, you may want to grab a coffee before continuing, there's a fair bit of ground to cover.
Enterprises with a big spend on digital marketing will be relieved that this move brings consolidation to a fragmented landscape. Often they have struggled to integrate their marketing efforts across disparate applications, both cloud-based and on-premise.
For many, Salesforce has already been the core integration point where marketing feeds into sales automation. Adding in ExactTarget's email capabilities along with the Pardot lead nurturing included in the acquisition will strengthen the case for standardizing on Salesforce for all those activities.
The only crucial gap remaining is in traffic analytics, currently dominated by Adobe, although Google is also an important player (others are Webtrends and IBM Coremetrics). Given the bitter competitive rivalry between Salesforce.com and Adobe, don't expect close partnership there.
Though this specific acquisition may have been unexpected, it should be no surprise that Salesforce.com has made such a bold move to capture a leadership position in what has become the fastest growing market within its ambit. Marc Benioff set out the parameters for success during Salesforce.com's most recent earnings call:
"[We're] number one in sales, number one in service ... by no means, are we number one in revenue, in marketing ... It’s a $100 million plus cloud and our goal is to be number one in marketing, but we realize that to be number one in marketing, we’re going to have to achieve more than $1 billion in revenue in that cloud."
Assuming it is completed (obstacles are not foreseen), the acquisition opens up an expressway to achieving that growth. Recent market research from Gartner highlighted that many of the fastest growing CRM vendors are in marketing automation and ecommerce rather than Salesforce.com's core sectors of sales automation and customer service.
Ten fastest growing CRM vendors as measured in revenue Annual Growth Rate (AGR) in 2012 include Zoho (81.2%), Hybris (78.6%), Teradata [Aprima] (70.4%), Bazaarvoice (56.2%), Marketo (54.3%), Kana (44.2%), Demandware (43.9%), IBM (39.4%), Technology One (37.1%) and Neolane (36%)."
By the way, this week's other surprise acquisition is SAP's purchase of ecommerce platform vendor Hybris,, the second-fastest growing company on the list. It reinforces the overall trend of established vendors buying up more innovative startups to ensure their application stacks keep pace with what enterprises are actually buying to address today's business needs.
In the CRM field, as I wrote back in January, all the innovation is taking place at the enterprise edge, automating external management and mobile apps [and] deliver a great customer experience across multiple direct and indirect touchpoints."
The simple explanation, then, for why Salesforce.com made this acquisition is that it couldn't ignore such a growth opportunity in its own front yard. The more complex explanation is that some kind of move was essential to sustain growth in the company's core Sales Cloud business. Making strides towards an integrated digital marketing and sales automation offering will help Salesforce.com offset renewal challenges in its core sales automation business by giving new reasons for prospects and customers to buy more of its services.
The challenge that Salesforce.com has been facing is that the cost of customer acquisition and renewal has been rising relentlessly: both at the large enterprise end of the scale and down among the long tail of small businesses. Coupled with slower growth having achieved leading vendor status in the sales automation sector, it had become increasingly heavy going to maintain growth momentum.
Earlier this year, a research note on Salesforce.com's outlook by Cowen & Co analyst Peter Goldmacher noted among other factors "accelerating declines in sales productivity."
Now to some extent, if you have a stick to beat the company with (as Goldmacher often does) the humungous piles of cash it has always spent on customer acquisition make an easy target. The simple riposte in cloud circles is that of course it's spending oodles of cash acquiring customers, that's how a subscription business builds growth.
But what if the spend isn't working as well as it used to? If instead of fueling growth, it is frittered away defending renewals and replacing the churn of lost accounts? If Salesforce.com is running fast just to stand still, then eventually the amount of money it has to throw at the market just to stay afloat becomes unsustainable.
Several years ago this possibility was raised to me by Oracle's then VP of CRM Anthony Lye, who told me that his sales team were deliberately targetting Salesforce.com customers in the run-up to renewal time to get them to switch. Even if the customer didn't come over (and with hindsight we can safely say few did), Salesforce.com would still have had to invest more time and effort into getting the renewal, increasing the lifetime cost of customer retention and raising the possibility of never being able to recover the initial cost of acquiring the customer in the first place.
With Salesforce.com increasingly keen to retain larger enterprise customers, its exposure to this risk is growing, while the cost of signing such customers in the first place is high. Strengthening the Marketing Cloud offering helps neutralize this threat by giving a bigger, better story for the salesperson to focus on at renewal time, while increasing the total value of the overall contract, which helps dilute the original cost of customer acquisition.
Having a better story to tell is even more important in the volume small business market. These customers are only profitable provided they are happily renewing with little intervention from the vendor's sales team. The cost of a tough renewal process will quickly wipe out any profit accrued over the lifetime of the account.
Fortunately, many smaller enterprises are indeed ecstatically happy with what the cloud application delivers, especially across highly distributed teams handling significant numbers of prospects and accounts. For those that are dissatisfied, Salesforce.com's first-line defense is a very simple lock-in: customers can't cancel mid-term. Beyond that, from what I've heard, it makes little effort to recover the renewal, and doesn't even bother to ask departing SMBs why they've decided not to renew.
The vendor has evidently decided it's far better to focus its efforts on keeping its customers happy in the first place. Having a one-stop-shop for digital marketing and sales automation will be a compelling proposition that SMBs have not had available in the past from a big-name vendor.
The one fly in the ointment for this outcome (leaving aside for the moment the possibility that the integration is botched) is that, once again, Salesforce.com in furtherance of its own ambitions has had to trample aggressively over the home turf of longstanding partners, including some of its earliest partners such as VerticalResponse.
We should now expect an acceleration in consolidation among rival companies. Perhaps Marketo will use some of its newly gained equity currency for acquisitions, while Oracle will look around for email marketing that complements Eloqua or perhaps will look to steal a march with a move into ecommerce by acquiring Demandware. There may also be an opportunity for Adobe to strengthen its own digital marketing line-up with a lead nurturing or email marketing acquisition.
While this implies some short-term disruption as vendors align their portfolios, it ought to be good news for customers in the long run, by bringing together more of these disparate offerings into ready-made functional suites.
Disclosure: Salesforce.com and SAP are diginomica premium partners at the time of writing.