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Constant Contact Becoming a Platform Vendor

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Known mainly as a provider of cloud-based email marketing solutions for small businesses, Constant Contact has been expanding its product offerings, transforming itself into a platform vendor.

With more than 605,000 customers (including roughly 40,000 net new additions in 2013 and 10,000 in the first quarter), Constant Contact has the ability to sell a greater number of solutions (covering event registration, online surveys, coupons and social media campaigns) into an increasingly large installed base.

Now it has the potential to do even more with a product called Constant Contact Toolkit, which it claims which brings together all of the online marketing tools needed to drive new and repeat customers across key channels.

Opening the Toolkit

Introduced in April, Toolkit is an integrated online marketing platform combining new and existing elements of Constant Contact’s product set. The company wants to make it as easy as possible for smaller businesses to find and engage with current and new customers across a variety of marketing channels.

With Toolkit, users can launch, monitor and analyze 15 types of marketing campaigns, ranging from newsletters to local deals. Customized design templates are available, and customer lists can be segmented, with every interaction tracked. The platform’s real time reporting on campaign metrics (including email opens, likes and coupon claims) shows users what worked best with each message or offer, providing performance details across the entire list of contacts. 

Toolkit’s Essential Package, favored by 50 percent to 60 percent of new customers, starts at $45 a month, while the Basic Package, which includes access to the eight most-used campaigns, starts at $20 a month. For $195 a month, the Ultimate Package gives users a personal marketing coach to help them set up and deliver campaigns.

In addition to acquiring new accounts — Constant Contact’s goal is to end 2014 with 635,000 paying customers, representing a year-over-year increase of nearly 7 percent — the company also wants to increase the average monthly revenue per user (ARPU), according to CFO Harpreet Grewal. Three years ago, the company’s ARPU was $37.45.  By the first quarter this year, it stood at $43.82, a gain of 8 percent from the same time a year ago.

Growing Lists, Cross Selling

Constant Contact intends to keep ARPU on the rise by helping customers grow their list sizes (bigger lists mean larger campaigns), cross-selling additional products into the base and moving users over to the higher-priced Toolkit offerings.  Today, the average Constant Contact customer has a list of more than 3,000 contacts, up from 2,200 just a few years ago. As for Toolkit, the average customer spends $10 a month more than the Constant Contact historical average.

Grewal said Constant Contact is on pace to exit this year with ARPU in the range of  $46 to $47, a gain of as much as 11 percent from $42.33 at the end of 2013.

Another factor helping contribute to revenue growth is customer retention. In 2009, the average customer stayed for 40 months, according to Grewal. Today, it’s around 50 months, and the goal over the coming years is 55 months. In the first quarter, the company’s monthly retention rate for paying customers remained in the historical range of around 98 percent.

Targeting Both B2C and B2B

About 45 percent of Constant Contact’s customers are business-to-consumer focused, while 30 percent market mainly to other businesses. Interestingly, Constant Contact tends to see higher retention rates among its non-profit accounts (about 25 percent of the customer base), which use email marketing primarily for donation campaigns.

One metric management pays close attention to is customer lifetime value, which has historically been in a range of $700 and $800, but last year trended up to $950 thanks to improved ARPU, higher retention rates and lower acquisition costs. The company’s goal is to exit this year at $1,100. Grewel believes Constant Contact over time is capable of getting this figure above $1,500 (and maybe even closer to $1,600) with ARPU at $50.

The 2014 consensus revenue estimate of $330.2 million indicates growth of 15.7 percent, acceleration from last year’s growth rate of 13.2 percent. Gross margin has been trending upward, rising to 71.4 percent last year from 70.8 percent in 2012. In the first quarter, gross margin came in at 72.5 percent, 170 basis points above the year-ago level. 

At a recent price of $31.89 (up 51 percent from the April 4 low of $21.08), Constant Contact shares trade at a forward price/earnings (P/E) ratio of 31 on the 2014 consensus EPS estimate of $1.02. On the 2015 consensus of $1.27 (expected growth of 24.5 percent), the P/E is 25. 

Title image by Hang Dinh / Shutterstock.com.

About the Author

Robert DeFrancesco is a seasoned tech-stock analyst, who, for 13 years, covered the technology sector for Louis Rukeyser's Wall Street newsletter. In 2003, he launched Tech-Stock Prospector, a unique investment research service utilizing a combination of fundamental and technical analysis to identify and capitalize on inefficiencies within the tech-stock sector.

 
 
 
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