Learn from the Credit Card Networks!

If you are building a two-sided commerce network or a supply chain finance company (and who isn’t doing the latter these days?), you will benefit from understanding the history and economics of the credit card and procurement-card (p-card) markets.

You can learn about the credit card market by reading Paying with Plastic, reading the prospectuses of Visa and Mastercard, or reading the financial statements of the public merchant acquirers, such as Global Payments, First Data (private, but still publishes financials), and TransFirst which just filed for an IPO.

Among the lessons you will learn from the credit card networks:

  • How to solve the “chicken and the egg” problem
  • How to massively enable “suppliers” (merchants)
  • How much mature networks get paid for standards setting and providing the commerce rails (20-30 bps)
  • How much mature merchant acquirers (supplier enablers) get paid for providing enablement technology, training, and taking on a little solvency risk (10-50 bps)
  • How much issuing banks subsidize the use of their cards by buyers
  • How many networks can survive in the long run–not many

The P-card market, the B2B cousin of the credit card market, is one of the original forms of supply chain finance.  It is a little harder to study than the consumer market, but is well worth the effort.  The best sources of information on p-cards are:  RPMG Research, NAPCP, as well as literature from American Express, USBank, and the other large P-card issuers.  The procurement card industry processes about $200 billion in spend annually and generates net fees (after rebates) of about $2 billion, so it is small relative to credit cards, but nothing to sneeze at.

The p-card industry perfected the art of subsidizing the buyer by providing corporations with rebates in return for spend.  The industry has struggled to make supplier and transaction enablement as easy as in the consumer world (partly due to the expensive fee structure–2%+ 45 days early payment), but recently the industry has tried ways to gain share in larger dollar size transactions, making p-cards even more a part of the supply chain finance game.  In fact, one way to view the current trend in the supply chain finance market is as an attempt to extend credit to the large, “middle class” of transactions and vendors.

Banks have traditionally focused their programs on the gigantic buyers and suppliers, while P-cards mop up the smaller transactions for these same credit-worthy buyers. Figuring out the right legal structure, rules, rails, and funding sources for the vast middle of the supplier market and higher credit risk buyers will take some thinking.   Much of that thinking amounts to adjusting the approach successfully modeled by the credit card industry!


  • big data,
  • a great transactional platform,
  • a legal structure that allows “click-through” participation
  • a smooth supplier enablement program and
  • access to competitive, elastic financing

and someone will create a giant business.  So far there are some contenders, but no one who has solved all of the pieces of the puzzle.

Gaming IPOs

I normally do not write about consumer Internet stocks, but the recent news that Alibaba invested in Kabam ( a game-maker) at a valuation of $1 billion and that Machine Zone (a top-grossing game on the Apple App store) is apparently raising money at a rumored $3 Billion valuation got me excited.

Why?  Because eventually these companies may go public and if they do, despite everything investors have learned about these game stocks, they will still likely be overvalued.  This will create a nice opportunity for the skeptics among us.

I’m not a gamer, never have been.  Not Nintendo, Xbox, PS 4, even apps.  (Maybe a little Fruit Ninja on the iPad when the kids were younger.)  I know very little about this massive industry and really have very little right to comment.  I hear the new games are multi-player, have new freemium strategies and they offer opportunities to buy in-game items, blah, blah, blah.    In other words, the proponents say, “these companies are different.”

But what everyone that has ever played any kind of game knows is:

  • very few of these games create massive franchises and become more than a passing fad.
  • competition in this industry is fierce
  • people only access a total of about 20 apps at any given time (Meaning shelf space is tight and yet supply is seemingly endless.)

Nonetheless, when the latest gaming fad hits the stock market, the public will likely throw caution to the wind and convince themselves that these companies will not be “one-hit” wonders.  In scientific terms, I suppose this is dubbed the “recency effect” by behavioral economists!

The pattern on the last two game IPOs, Zynga and King Digital, could not be more clear. Even though Zynga sank its first day on the market, and King Digital was much more reasonably valued, they have both been good shorts.




Rovio (remember Angry Birds?) did not go public but still reported in April (presumably as a public service) that its 2013 profit fell 50%.

So here’s to Kabam and Machine Zone, we are waiting for you!

B2B Software Blogging is “Hot”

How can I make such a bold claim?  I submit as evidence the following actual pictures of folks (or their colleagues) who have recently asked to link to me on LinkedIn:

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Forgive me, as I do not mean to be sexist (I am, after all, Daddy to two lovely, young ladies and am married to another) but these potential new contacts do not seem random to me.  What could it be that unites these young ladies in their interest in linking to me?

I have several theories:

Theory #1.  My LinkedIn picture was taken professionally many years ago when I had hair. Perhaps this is just an example “associative linking”.  You know, that is the process by which attractive people sort themselves into groups of similarly attractive people.  This is, by far, my favorite theory, but it is also the least likely.

Theory #2.  I write about really interesting B2B software subjects in a pithy, humorous, accessible, some might even say alluring way. ;-)  Maybe this subject is particularly interesting to young, female, brunette readers.

Theory #3.  I have also noticed that all of these young ladies work for companies that provide inside sales/lead generation services.  Is it possible that these people simply want access to my network of contacts?  And is it further possible that these companies have learned that men on LinkedIn seem to accept, and respond more to, links with pictures of attractive young women?  No, that cannot be it.  This theory seems impossible in this day and age.  We all know sex does not sell.  Only adding value and being a trusted advisor.

If you have been a “victim” of the same sales approach, please do not let me know.  I want to continue to believe my first two theories and I do not want to alert LinkedIn to this particular form of abuse of their system.

Running with Blinders On

All good Dads read to their kids.  I have a great Dad.  My Dad taught me to read The Daily Racing Form–the bible of horse racing.

If you are a nerd and/or like to bet, the Form is simply irresistible.  Think of it as the original “Moneyball” database or Fantasy Sports league. The Form provides prospective bettors with a wealth of information on the horses running in the day’s races, including:

  • Historical performance by stage of race, track condition, etc. for their last few races
  • The quality, weight carried, and jockey in those races
  • The genealogy and trainer of the horse
  • The horse’s latest workout times
  • A speed rating which benchmarks performance of the horse versus that track’s record for the same distance
  • Last, but not least, even whether the horse was wearing “blinders” or “blinkers” in those races!

Blinders are worn by horses thought to be poorer performers when they can see to the side or behind them.  Blinders really are designed to provide the proverbial “tunnel vision”.

What I’ve since learned about B2B software, and life in general, is that unlike horses, we are all running with blinders on.

When I was at Ariba looking for networks for us to buy, I was confident I had the most exhaustive list of B2B networks in the world.  I went to conferences, scoured the web, had inbounds from investment bankers, subscribed to analyst reports,  etc.  I’d test my list with folks and generally find my list to indicate a broader perspective.

However, when I left Ariba and started working with both horizontal and Industry Cloud networks, I discovered that I had had blinders on the whole time! Within a few months–just by looking at the market differently–I discovered a couple hundred more networks!  (I used to post a graphic of these companies, but have since given up based on the futility of that effort.)

In fact, every time I look at a new industry, I discover many more SaaS B2B players than I imagined could possibly exist.  A recent example is the real estate and construction industry.  This sector is very hot right now, perhaps because the 2008 meltdown killed real estate and it is only now recovering!  Here’s a great graphic of the companies (B2B and B2C) just involved in trying to improve various aspects of the residential real estate market:


Generally I have been more interested in the commercial construction market than the residential market. In the past week, I discovered three more companies in that space, all of whom are trying to build networks. A final example:  my recent work has been in the healthcare industry and that industry would fill at least three pages like this!

When I talk to entrepreneurs who are looking for advice, I always ask “Who else is doing the same thing you are?”.  I’m not trying to scare them or discourage them, I just want to see if they have studied the competition. More often than not, I find they are running with blinders on too!

IPO Filings: First Yodlee, then Yodle, what next, Yodl?

My last post noted that Yodlee, a data aggregation provider in financial services, had filed to go public.  This week a provider of cloud-based marketing automation, Yodle, also filed.

Marketing automation software is one of the great growth stories in B2B and B2B2C over the past 10 years.  The Internet and cloud have forever altered marketing departments just as they have IT.  Every small business, in particular, needs:

  • a web presence
  • to understand SEO and SEM
  • a mobile strategy
  • a social strategy and
  • e-mail marketing–just to name a few

Players in the space include Intuit, Google, GoDaddy, Angie’s List, Constant Contact and a host of others.  (Eloqua and Marketo, two giants in the space target larger companies.)

Yodle has a broad offering to help local businesses establish a basic web and social media presence.  Yodle also has tools to connect the marketing function to the back office. In addition, they have a very interesting offering (Centermark) designed specifically for franchise networks and other multi-location providers.  The basic diagram of their offering is as follows:


Yodle targets 7 million local businesses and now has about 50,000 customers.  As with every cloud-based marketing automation provider selling to small businesses, the most critical questions are:

  • Has Yodle figured out how to acquire clients at a reasonable cost?  (CAC for SaaS metrics aficionados) and
  • Does Yodle keep these customers long enough, at a high enough gross margin to make money?  (Lifetime Customer Value (LTV) in SaaS metrics terminology)

Yodle claims to have solved these issues:

Our competitive strengths result in what we believe is an attractive business model. Our low customer acquisition and onboarding costs minimize our initial investment to bring on new customers and allow us to achieve rapid payback. We define payback as occurring when the costs associated with acquiring and launching a cohort of new customers we acquired directly (i.e., not through resellers) in any given quarter is offset by the ongoing cash flow from those customers, less our ongoing costs. We are typically able to generate positive cash flows within the first year after acquiring and launching a cohort of new customers, including the impact from customers who do not renew their subscriptions or service during the first year and excluding overhead costs. As a result, we believe our business model benefits from rapid payback. We refer to customers who we acquired directly (i.e., not through resellers) and who remain as customers after their initial year as our tenured customers. Tenured customers represented approximately 41% and 44% of our direct customers as of December 31, 2013 and March 31, 2014, respectively. The percentage of our direct customers that are tenured customers generally has been increasing over the last year. For the 12 months ended March 31, 2014, we experienced a monthly average revenue retention rate of 97.5% for the media and platform revenues of our tenured customers. The monthly average revenue retention rate for our tenured customers generally has been improving over the last year, and we expect the monthly average revenue retention rate for our tenured customers to continue to improve as our mix of revenues shifts toward revenues from platform products, as revenue derived from customers who subscribe to our platform products generally exhibits a higher retention rate than revenue derived from customers who purchase our media product. We believe that our low customer acquisition and onboarding costs, rapid payback and high monthly revenue retention of our tenured customers results in a business model that generates attractive customer economics and high returns on our initial investment.


From Yodle’s prospectus, it is not possible to exactly calculate their CAC or LTV, but we can estimate both.  Yodle’s CAC bounces around a bit, but appears to be in the $5,000 to $6700 range based on total quarterly sales and marketing expenses and new customers added.

Using Yodle’s monthly average retention rate (97.5%) for customers more than a year old and those sold directly, we can determine that for these customers the average tenure is 40 months.  Yodle also tells us that their flagship product now sells for under $300 and has a gross margin of about 70%.  This makes Yodle’s LTV about $7500. This LTV is pretty tight relative to CAC but it does mean each new customer added contributes to Yodle’s fixed costs.

Before investing, I’d like to see clear numbers on CAC and LTV  from real cohorts. This is the kind of information that Angie’s List provides–much to their detriment!  The fact that Yodle states its retention rate in monthly terms (which always sounds better) and makes several exclusions from their calculations makes me a little nervous.  In annual terms, Yodle’s retention rate is about 74%, though they say it is improving.

Yodle is going to need to improve retention, while fighting off intense competition, if it wants to be a great call.

Golden Yodlee? (say that five times fast)

While the hit parade of small biotech IPOs continues, the number of cloud software IPOs has slowed to a trickle.  Perhaps everyone is just waiting for the mother of all B2B IPOs, Alibaba?

In the meantime Yodlee, a company whose name has been around since 1999,–and which nearly disappeared a couple of times–filed for a $75 million IPO.  If you know Yodlee at all, you probably know about their data aggregation capability.   This functionality allows consumers and small businesses to pull together in one place otherwise disparate accounts across many financial institutions–a la Mint.  With this product, Yodlee is the “plumbing” that underlies many personal/SMB financial applications like Learnvest, Xero, and tools that banks/brokers give you to manage your whole portfolio.

Yodlee wisely positions themselves as “the Financial Cloud”:



Or the slightly more detailed version:


It’s a nice story, with many of the elements necessary for a good business:

  • Blue-chip client base
  • Great position in the large, but presumably commoditized, data aggregation business
  • Silicon-valley based technology developer, with large workforce in India
  • API layer for platform-building and limiting competition with their customers
  • Possible network effects in the data analytics and security areas, as well as economies in building direct connections to financial institutions

The prospectus also highlights several possible concerns:

  • Yodlee is not the same growth story as many of the cloud software IPOs.  The CAGR for 2009-2013 is 20%.  (Though growth for the latest quarter is 28%.)
  • BofA accounts for 13% of revenue and the top three customers represent almost 25% of revenue for the latest three-month period
  • Big competitors:  Fiserv, Intuit, etc.
  • Privacy and regulatory concerns are always a possibility in financial services
  • Unclear as to whether the products are really different or just different positionings of the same product

What is intriguing about Yodlee is the apparently accelerating growth over the last 15 months.  This growth is not coming from the top three customers, but it is hard to tell where the growth is coming from.  I’d like to know more about the money movement, security, and data analytics products.  If those are real and growing, there could be something very interesting here.    I’m hoping many of our readers, who are experts in this space, will chime in for the better good!

The market will have to decide what value to give to a slightly slower grower than they are used to and one that is more of an infrastructure play than an end application/brand.  I’m going to watch this IPO carefully.  I’m a sentimental sucker for companies that have slogged through slow-moving industries for 15 years and finally started to see some success.

Most of the time patience is, indeed, a virtue.  But sometimes it is just prolonged obliviousness!

Simple, but Powerful, Business Model Changes

A  recent Planet Money podcast about CHEP, a pallet company, reminded me how simple business model changes can transform an industry.  (You can listen to the podcast here.  Or read a great article about the industry here.)



If you love business and you do not know the CHEP story, you need to.  CHEP made two simple design changes to the massive pallet industry and in the process became a near monopolist business in some countries:

1.  CHEP designed a better pallet–plain and simple.  They made the pallet “forklift-accessible” from all four sides, not just two sides.  In the process, they also made the pallet a little sturdier and a little more expensive.  This was not exactly rocket science.

2.  Because of the increase in cost/price, CHEP also decided to rent the pallets, rather than sell them to customers.  Today, we would call that PaaS–Pallets as a Service!– or part of the subscription economy!  (To keep track of them, CHEP also painted their pallets blue, added the phone number, and eventually paid rewards for returned pallets. This latter move unwittingly allied the ecosystem with them.)

There’s more to the CHEP story than that, but not a whole lot more.  Simple changes revolutionized an industry.

Another prominent example of simple business model decisions paying off in huge ways comes from James Stewart’s great book on the downfall of Michael Eisner at Disney. My takeaway from the book, was that Eisner did three really smart things during his tenure at Disney:

1.  He opened up the vault of old Disney movies (and re-released them every few years) to the VCR market.

2.  He raised ticket prices at the theme parks.

3.  He decided that the hotels that surrounded the theme parks should be owned by Disney, not by other folks who were essentially living off the attractions Disney had built.

My recollection is undoubtedly faulty, but for me the book was about how successful these moves were and how almost everything else Eisney tried ended up destroying shareholder value.  The ABC/ESPN purchase was enormously successful, but not during his reign and only the ESPN part worked out–albeit unimaginably well.  EuroDisney was a dud, as were other new theme parks, he had to pay Jeffrey Katzenberg $270 million to settle a lawsuit, and go.com was a $1 billion disaster.  I think Disney channel also fared rather poorly. Again the simple stuff paid off.

There is real power in simplicity, building on one’s core, and in thinking through pricing very carefully.  Not all that insightful, and yet…