IBM

For marketing software firms, a white-knuckle ride (and bare-knuckle brawl)

April 18, 2014: 3:15 PM ET

Revenue for marketing automation software is set to triple by 2020, and it's a three-way fight for supremacy.

By Heather Clancy

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FORTUNE -- These days, most purchasing decisions -- not just the big-ticket ones -- are finalized long before someone reaches for their wallet. As a result, it's more important than ever for marketers to influence potential customers at the dawn of the sales cycle, without being too obvious.

That new reality is galvanizing interest in marketing automation software that personalizes messages on the fly. In late 2012, Oracle (ORCL) bought one of the most promising players, Eloqua, for about $810 million. Last week, IBM (IBM) made its own play for share, announcing that it will buy one of the category's fastest growing players, Silverpop, for an undisclosed sum. The deal is expected to close in the second quarter.

IBM will combine Silverpop's cloud-hosted services with its own extensive portfolio of marketing and customer analytics software, an ecosystem that includes more than 140 different services and applications. "The acquisition of Silverpop turbocharges IBM's ability to put the customer at the center of any organization," said Craig Hayman, general manager, Industry Cloud Solutions for IBM, when the deal was announced. "Now, nearly any marketing, commerce or customer service professional from any business will have the ability to deliver the kinds of personalized customer experiences that make a measurable impact on the brand experience and the bottom line."

The timing seems ideal. After a breakthrough year in 2013, revenue for the marketing automation category will reach $1.9 billion by 2020 compared with $550.7 million in 2013, according to new forecasts from research firm Frost & Sullivan. (The forecast number doesn't include software focused on marketing process optimization.)

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Growth in 2014 will be especially rapid in North America, western European countries including the United Kingdom and Italy, and parts of Asia-Pacific like Singapore and Australia, said Hiral Jasani, digital media analyst for Frost & Sullivan. So far, most early adopters have come from the technology industry, but companies in financial services, health care, retail and telecommunications are increasingly exploring use cases.

"The velocity of online customer conversations, fueled by proliferation of devices, is becoming difficult to manage for most organizations," Jasani said. "Marketing teams are getting frustrated by multiple customers touch points. Multi-channel marketing is the need of the hour."

The main beneficiaries of this frustration so far have been the de facto "Big Three" players in this category -- Marketo, Oracle Eloqua, and Silverpop -- which last year drove almost half of the new deals, according to Frost & Sullivan's analysis.

What makes these companies unique is the maturity and breadth of their offerings. Silverpop, for example, scored many early wins with business-to-business marketers trying to identify the best-qualified prospects for their sales counterparts, the company's CEO and president Bill Nussey told Fortune before the IBM acquisition was announced. It has since expanded its focus to business-to-consumer companies, and some of its clients include Conde Nast, Acura, Mint.com, Thomas Cook, and Kimberly Clark. "You have to understand what the customer is interested in, without them telling you," he said.

No one wants to be thought of as someone's "audience," but most people appreciate subtle gestures, such as the "recommendations" that are surfaced on e-commerce sites based on past purchases. "In five years, customers are going to reject audience marketing," Nussey said. "In five years, if you aren't marketing like Amazon, you're not going to have any customers. We are still at the beginning of that transition, but customers are fickle."

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Another reason marketing automation software adoption has accelerated dramatically in the past five years is the software as a service delivery model, which is another reason Silverpop was so interesting to IBM: many offerings can be paid for as a subscription, which helps chief marketing officers account for the investment as part of operational expenses instead of having to manage it as a capital expense.

Frost & Sullivan's Jasani suggests there are three pricing tiers for marketing automation software, starting at $20,000 annually for basic lead management, tracking, email marketing and integration with customer relationship management platforms; to $50,000 per year for comprehensive solutions that include more advanced analytics features and features such as lead scoring, which helps sales teams prioritize prospects.

"Marketers have had a really hard time going to the CIO to get the investment money for this, but the reality is that marketers already spend a lot of money. Now, they can buy technology out of their operating budget," said Jon Miller, co-founder and vice president of product marketing for Marketo, which boasts customers including McKesson (MCK), Curves International, Chrysler, Canon (ADR), Panasonic, Sony (SNE) and SunRun.

That's not to suggest this stuff is easy. On paper, the process of adding marketing automation might look simple but if a company's existing lead generation processes, databases or systems are inefficient or it doesn't have the right sort of messaging content to make things personal, it won't get the results it is seeking, Jasani said. "There is no point in having unrealistic expectations from the software, if you don't have the required talent and resources," he said.

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There also is no shortage of smaller companies in this space, which has already triggered consolidation and suggests the race for market share is far from over. Marketo, for example, snapped up personalization company Insightera in late December 2013. Companies using the technology can enable their websites to display specific content based on the identity of the visitor.

For example, if you previously visited a page and browsed content about convertibles, the images can be rearranged to pique your interest. "We know the campaign history. It's all based on information we might use to present the most relevant experience for you, individually," Miller said.

One company to watch closely is Salesfusion, which raised $8.25 million in Series B funding in January, led by Noro-Moseley Partners, BLH Venture Partners and Hallett Capital. That brings its total to around $10.1 million.

The company's platform is integrated closely with Microsoft Dynamics CRM and now includes predictive scoring, which means users will be able to request reports based on phrases such as "show me more leads like this" or "show me fewer leads like that." It gained this technology through its acquisition of LoopFuse in February.

"When we talk to the market, we hear that the traditional marketing automation systems haven't delivered on the promise of bringing sales and marketing together," said Christian Nahas, CEO at Salesfusion, in a statement. "Smart marketing automation is about doing more than reducing friction between sales and marketing, it's about removing it."

Editor's note: This story has been updated with additional information on the IBM-Silverpop deal.

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