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INNOVATION ECONOMY

Keeping it simple for the customer

E-mail marketing firm thrives following Intuit model

By Scott Kirsner
November 2, 2008
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In 1999, when Gail Goodman and Bill Kaiser met for lunch in the Financial District, Goodman asked for the venture capitalist's advice about whether she should take a chief executive's position she had been offered at a six-person software company that was still operating out of the founder's attic.

At the time, Kaiser, a general partner at Waltham-based Greylock, advised her against becoming the chief executive of Roving Software, which was developing a software package that would help small businesses run e-mail marketing campaigns. Too many competitors are already doing that, Kaiser said, adding that it is always a challenge to make money by selling to small businesses.

"He didn't like the opportunity," recalls Goodman, who had never run a company before. "But I was ready to be a CEO." She took the job.

In the eight years since, the company: nearly went out of business twice; changed its name to Constant Contact; shifted from being an install-it-yourself software product to a hosted online service; grew from six employees to 400; raised $36 million in venture capital (some of it from Kaiser's firm); and went public last October in an initial offering that raised $107 million. In June, Goodman was named the Entrepreneur of the Year by Ernst & Young, for the software category in New England. The company is expected to earn about $86 million this year, a 70 percent increase over 2007. And it may be positioned to handle an economic downturn better than most companies.

The first few years of Goodman's tenure were tough. Though she knew there was "a huge market of small businesses" that could benefit from using e-mail to keep in touch with their customers, in 2000, very few knew about or were doing e-mail marketing. Venture capitalists she spoke with wondered why the company was charging a very low price for its service (today, the typical customer spends about $35 a month with Constant Contact) instead of selling software to big companies for thousands of dollars, and raising the bill even more with pricey support contracts. Even Goodman herself had moments of doubt about the strategy.

"When we had five-thousand customers, it felt great, but it didn't cover our salaries," she recalls.

Though Goodman eventually found financial backers like Waltham's Commonwealth Capital Ventures and Longworth Venture Partners, the aftermath of the dot-com implosion nearly wiped out the company, which was having trouble raising enough money to break even. The closest call came in the summer of 2001, when Constant Contact came within a week of having to turn out the lights. But Goodman managed to bring in some new financing - a $5 million round led by Verisign Inc., the network infrastructure company.

"There were several painful down rounds in 2001 and 2002," Goodman says, where investors determined that the company was worth less than it had been worth at an earlier financing stage. "But you live to fight another day."

One key to getting the company on the right track was keeping it focused, Goodman believes. At Constant Contact, the goal was to make it easy for companies to communicate with customers via e-mail - and that was it.

She also discovered that even though it was far more efficient to have customers only interact with Constant Contact through the website and e-mail, a little hand-holding would help increase customers' comfort-level with the product - and cultivate loyalty.

"Most of our customers are doing e-mail marketing for the first time," she says. "You don't want to be a spammer, or have your e-mail include links that don't work."

So any customer can call Constant Contact for support, between 9 a.m. and 9 p.m. And there's no limit on the number of calls. The result is that the top source of new customers for Constant Contact is word-of-mouth from existing customers, and the average customer uses the service for 45 months. Constant Contact has about five times the number of customers - just over 200,000 - as its closest competitor, Vertical Response Inc. The company also runs live seminars around the country and offers interactive "webinars" on topics like how to write a compelling subject line.

The company's success "was based on following the Intuit model," says Mike Fitzgerald, referring to the maker of Quicken personal accounting and TurboTax tax-filing software. "They made the thing so easy to use that you can get a mass audience pretty quickly."

Fitzgerald was the partner at Commonwealth Capital who invested in the company's very first funding round; today, he says his only regret is that he wasn't able to put more money into the company before its IPO. The company was supposed to start trading at $16 a share; it opened at $26 and closed at $27. Since then, the shares have drifted down with the market, to about $12.

One big question for the company is whether e-mail marketing will continue to be as effective as it has been. JupiterResearch found this year that e-mail marketing had persuaded 44 percent of consumers to make an online purchase, and 41 percent to buy something in a real-world store.

Still, there's a chance the market could become saturated. Even if a company is restrained about sending only one e-mail a month to its customers, observes Forrester Research analyst Julie Katz, other companies might choose to send one a day.

"It's the cumulative effect of all those marketers sending e-mails that can diminish the impact of the medium," she says. Katz adds that in a recent Forrester survey, she found that people's usage of e-mail has actually been declining, while other activities, like sending text messages or participating in social networking sites like Facebook, is on the rise.

Will Constant Contact expand its services to help small businesses market to customers through those new channels, or others, like blogs? Goodman says the company regularly talks to its customers - but recently found that most are still not even reading blogs, let alone writing them. She says that the company would consider building any new tools that will "help our customers build world-class customer relationships."

Analysts expect the company to earn about $125 million next year.

"They're accelerating away as a leader in the e-mail marketing space," says Richard Baldry, who follows the company for Cannacord Adams. "In a challenging economic climate, their balance sheet gives them flexibility, in terms of looking at acquisitions, and the visibility of being a public company is an advantage." (As of this summer, the company had just over $100 million in cash in the bank.)

Even in a recession, Goodman still views it as a good time to find new customers: Her service is inexpensive enough that current users don't look at it as a significant cost of doing business, and new users may feel it's more important than ever for them to try to retain existing customers.

"Buying two pounds of Dunkin' Donuts coffee costs them more than paying for our service," she says.

When I asked Goodman if she would know that the economy was flailing, based on the way her business is performing, she had a one-word answer: no.

"Every business indicator we see says keep on investing in the customer experience, and keep on spending to acquire customers," she says, adding that the company is spending about $10 million on a national radio campaign that will run until mid-2009. Constant Contact also has 30 positions it is seeking to fill at its Waltham headquarters.

Her biggest worry in these chaotic times is that existing customers may go out of business: "The best e-mail marketing in the world can't save a failing business," she admits.

Goodman won't say it, but she seems glad that she listened to her gut, rather than the free advice Kaiser offered at that 1999 lunch.

Though now, she says, he serves on her board. And she does listen - some of the time.

Scott Kirsner can be reached at kirsner@pobox.com.

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