Power in SMB Email Marketing — MailChimp’s rise, sustainability and ConstantContact’s decline
I was in the email marketing industry for over 13 years as the founder of StreamSend (founded in 2004, acquired 2017) — I saw, first hand, a story of David vs Goliath.
I have a lot of respect for Ben Chestnut, Dan Kurzius and the MailChimp team (founded in 2001). Ben and I had similar origin stories — immigrant parents, SMB exposure, email marketing coming out of consulting. So how could I not have admiration and respect? They used creativity, and lateral thinking, to not only kick our rear ends, but they also managed to get a public company delisted!
Once upon on a time….
In 2006 Constant Contact had $28M in revenues. [*] Mailchimp had a fraction of those revenues, low single digit millions by my estimate.
After many years they managed to surpass the long time dominant player: Constant Contact (founded in 1995).
Today, MailChimp is the dominant company in SMB email marketing (and moving into a broader category of marketing) — having revenues of $700M and continuing to grow at~15% annually [*]. They never raised a round of capital.
Constant Contact has revenues of $410M in 2018, up 2% from 2017. [*]
If we rewind the clock we’ll see a very different world, one where Constant Contact was a dominant force.
How did this change of fortunes happen? Wouldn’t one expect by all accounts that such a large, well funded incumbent should still rule supreme?
I researched this piece to better understand the Strategic moves that helped MailChimp succeed by using Hamilton Helmer’s 7 Powers framework. [*]
Strategic Power Law Decisions
Did MailChimp execute well? Yes. Is that the sole reason for their success? No. I believe many other players executed just as well.
MailChimp, however, made several strategic decisions, well over ten years ago, that set them on their path of dominance. These decisions, because of their impact, were power-law decisions, or what I would call Power Moves.
A little history
Here is a bit of a history of both companies, followed by a graph from Google Trends. It’s easy to spot the impact of the Power Moves.
ConstantContact:
- Founded in 1995
- Revenues of $8M in 2004
- Revenues of $28M in 2006
- IPO in 2007
- Revenues of $129M in 2009
- Delisted by Endurance in 2015
- Revenues of $410M in 2018
MailChimp:
Power Moves
There are two high level strategic decisions, combined, that led to super growth and sustaining Power for Mailchimp: 1) The Freemium decision, and 2) Integrations.
Freemium
The Freemium decision provided Counter Positioning for MailChimp vis a vis Constant Contact. Constant Contact’s main segment and source of revenues was from customers paying $30 a month for 2,500 email contacts. MailChimp started offering free service to customers in this tier in 2009, thereby rendering Constant Contact helpless.
It would be interesting to see the Constant Contact executive team’s reaction. Just imagine: you’re running the meeting, you have $129M and you’ve heard that this little company comes out with a free offering targeted to your segment. What would you do?
How could Constant Contact respond? Well, they don’t respond, nor did they really have any good options.
They could try to create their own free tier? Well if they did, what would happen to their revenues? Their business would decline. Why would management want to even consider that — just think about the impact on stock price and their personal compensation! There’s a major agency problem — the incentive to respond in kind at the time is not there.
One could imagine the meeting going something like this: “Free email marketing plan? Ha. Silly. These Chimp guys are going to really get it, it’ll never work, and imagine how much spam they have to deal with. Let’s grab lunch.”
I personally remember seeing MailChimp’s announcement and my reaction was two fold: 1) I was very uncomfortable. I knew viscerally this was something significant, but not sure why, nor that it was a Power Move; 2) I immediately wondered: “how much energy and time would they have to exert on battling abuse?”
Spam and Abuse
The reputation of the email sending company is paramount when it comes to email marketing. For context: when an email is sent, it comes from an IP address that is owned by the provider, say MailChimp. The quality of content, and email addresses from one customer can either positively or negatively affect all other customers. One sender with email content that is spam, can cause legitimate emails sent by other senders to go to spam as well.
So providers are very careful to make sure that that “spam” is not sent from their platforms, else the reputation of the platform and IP addresses will suffer. Providers generally have a deliverability and abuse department that monitors, reviews, warns, and helps senders. Mostly people powered.
MailChimp decided to offer a free plan for up to 2,000 contacts. That’s enough of a list size to be a spammer’s paradise. A flock spammers did.
Enter Omnivore
I suspect all competitors large and small saw the Free idea, did some back of the envelope calculations and decided that they would not be able to profitably manage the abuse. They would need to staff an army of abuse staff.
As Ben said:
“The number of users shot up 240 percent to 290,000 within seven months. Emails sent soared from 200 million a month to 450 million. Spammers flocked to the free service, and abuse-related issues grew 354 percent. The staff to deal with abuse would have risen to 800 percent if not for technology.” [*]
That’s 8x more staff… if you had a help desk of 5 people (costing say $400K), you’d then need 40 people (costing $3.2M). That’s insane.
How did MailChimp do it?
They developed a tool called Omnivore.
They ran through 61 trillion data points which ultimately created software, called Omnivore (launched in 2010), that would send warnings, suspend and shutdown accounts. Omnivore made the unit economics work.
With Omnivore, Counter Positioning was complete.
Counter Positioning: Freemium Benefits & Barrier
Barrier
- Other small competitors couldn’t easily replicate the freemium at scale without developing their own Omnivore. It was a tough enough challenge that I’m not aware that anyone really tried. Part of the reason is the data problem — there needs to be sufficient data points to analyze. So a company would have to have been brave enough to first launch free, manage abuses manually, get data and then build their Omnivore. The proposition of opening the flood gates, not being able to handle the volume of spammers, then getting blocked by the ISPs was surely scary.
Benefits
- Low cost to acquire customers. Many decided to try Mailchimp, and quickly grew out of the 2,000 contact limit, then upgraded their plans.
- Exposure led to MailChimp becoming the de facto email marketing provider for SMB focused partners. Which leads us to the next topic: Integrations.
Integrations
Ben’s advice for founders:
“…integrate with some great companies with open APIs, and use their popularity to grow your own customer base. Then, before you know it, new companies will start integrating with you to leverage your customer base.” [*]
By 2008, MailChimp had developed an API and started creating a few integrations. Although back then the idea of having API’s and integrations wasn’t as common place as it is today, I wouldn’t consider it a Power Move. What came next though, was.
The API, and some Integrations were launched in 2008. Freemium came in 2009. Freemium brought an explosion of users, and an explosion in revenues. The Takeoff phase had begun and with it the start of Scale Economies. Mailchimp all of a sudden got an influx of profits to spend and instead of a traditional approach, they spent it using some creative, lateral thinking: they created a $1m Integrations Fund. [*, *]
“Got an idea that could integrate with MailChimp’s delivery platform? Let us fund it.”
“We’d offer them a few thousand dollars to fund their integration, and tell them that if customers like it, we’d promote it more.”
MailChimp would pay a company to build an integration, and they’d promote it if their users seemed to like it (and we’re talking 300K users at the time). A great value proposition to other SaaS companies.
The amount of the fund was $1M, was a large fixed cost, but nominal on a per user basis for fast growing MailChimp. It was however, a sum too large for most other competitors, besides Constant Contact, to match.
As for Constant Contact, they seemingly were unknowingly Counter Positioned and grossly underestimating the circumstances.
From Scale to Network Effects
What started as a Scale Economies led to Indirect Network Effects. The $1M fund was only possible because of MailChimp’s size and scale. Then network effects kicked in as users grew and integrations grew.
A nice virtuous cycle was formed:
- Many SaaS companies started integrating, they promoted their integrations, their customers saw the integrations, these customers signed up with MailChimp as they needed email marketing.
- More developers saw rivals integrating with MailChimp, they then started integrating to MailChimp.
- MailChimp customers started asking their other SaaS providers about integrations. The providers started doing integrations (eventually a financial incentive from the $1m fund wasn’t needed)
- MailChimp customers saw certain integrations and selected SaaS solutions from the list of providers that integrated with MailChimp.
And the rest is history…
Today MailChimp is a force to be reckoned with.
They have the following competitive barriers:
Switching Costs. Most companies don’t want to deal with the hassle of changing email marketing providers because it would mean updating integrations, losing historic reporting data, and learning a new system. Email marketing switching costs aren’t as high as say a CRM (because many different departments, and people are engrained). They are, however, high enough that there would have to be a compelling value proposition for someone to wish to move.
Indirect Network Effects. MailChimp continues to have Indirect Network Effects because of the sheer number integrations partners — pick your favorite tool and I’d wager MailChimp has an integration, and chances are the SaaS provider built it.
Any Vulnerabilities?
With that said I think they are vulnerable in vertical segments because the barriers based on the number of integrations needed may not be that high, which negates the Indirect Network Effects.
For example, in ecommerce: integrations are mostly really needed for a handful of shopping carts.
A company entering such verticals could come up with a compelling enough value proposition, which, if left unaddressed, could gain momentum. Case and point being Klaviyo for ecommerce. They’ve managed to do quite well with real time data segmentation capabilities. [*] Mailchimp has yet to fully respond (and I wonder why?).
Or if a large number of customers are concentrated around a single integration partner, which is isolated from other integration partners. A strained relationship here could result in vulnerability. Again, for example, ecommerce really needs an integration into the individual cart and maybe a popup tool, Case and point being the strained relationship with Shopify, with the beneficiary being Klaviyo. [*]
To any founders reading this section: before you dive in and try to tackle the vulnerabilities, remember that you need a compelling, sustainable reason for customers to consider you. Sustainable being key — because if your reasons are features (and not a Strategy to develop your own Power), then plan for what happens when MailChimp adds those features. Or hope you’re lucky enough that they don’t.
P.s.
To Ben and Dan from MailChimp: congrats on the success. I’d love to buy you guys a drink.
