There are several enterprise players that want a share of Salesforce’s business, but just aren’t making headway by knuckling up against the company’s dominant, entrenched SaaS CRM offerings. Rather than competing head on, a smarter approach for these businesses is to “front door” Salesforce, instead.

By acquiring Marketo, a competitor could get into Salesforce’s accounts, then, over time, work themselves down the funnel and leverage better integrations with Marketo in order to eventually displace Salesforce. Marketo’s strategic foothold in the enterprise and its current market value relative to potential acquirers like IBM, Microsoft, Oracle, SAP and even Salesforce make this a great time to buy the leading marketing automation vendor.

The sweet spot in the sales and marketing stack

Many industry watchers overlook the mission-critical role Marketo plays in its customers’ go-to-market operations. The majority of Marketo’s 4,000 customers also use Salesforce, but the marketing automation system has access to more data about the funnel than its CRM counterpart. Marketo can sync bi-directionally with Salesforce, capturing all the data stored there, while also holding top-of-the-funnel lead behavior data that doesn’t get stored in CRM. Hence, it has access to an invaluable superset of data about a company’s potential and existing customers.

This is the data platform for which developers should want to build apps. There’s a lot of potential for Marketo to do more with its LaunchPoint platform and replicate the success Salesforce has seen with the AppExchange’s community of killer apps (including Marketo). For example, an acquirer could tie Marketo with its cloud offerings to provide an even broader set of data (i.e. Salesforce + Marketo + the acquirer’s data) and build a competing developer platform.

Bundling a cloud infrastructure solution like Azure, AWS, Heroku or Google Compute with Marketo would also help the system scale better. Because marketing is multi-channel and more data-driven, companies are collecting thousands to millions of events from their website activities, which are instrumented with Marketo landing pages and forms.

A better cloud environment would enable improved reporting, better performance and faster workflow triggers than you can get with today’s marketing automation systems that simply weren’t designed with this much data in mind. Additionally, having both a CRM and Marketo in one product portfolio would drive faster and more sizeable deals, similar to the strategy Salesforce employs with Pardot.

A Marketo acquisition could be a great defensive move for Salesforce, but it would be messy culturally.

Let’s also consider the rest of the marketing automation landscape. When you compare Marketo’s go-to-market approach against competitors like Eloqua, Pardot and HubSpot, it has a distinct advantage. Marketo is the only vendor that started out by focusing on the mid-market and is steadily moving up-market — a strategy that’s been proven successful time and again by market leaders like Salesforce, New Relic and others.

Marketo’s competitive positioning against Eloqua has been that it is faster and slicker. While Eloqua first established the marketing automation category, and is known to be more powerful and better for complex environments (although that gap is closing), it is considered more difficult to set up than Marketo.

It’s really hard for Eloqua to compete against Marketo, because offering more advanced functionality perpetuates a cycle of further complexity, but transitioning to a “faster and slicker” solution risks alienating big customers and power users. Marketo’s smart strategy has led to more deals and more customers, despite entering the market after Eloqua.

At the other end of the spectrum, HubSpot focuses on selling to much smaller companies, and offers a self-service solution as opposed to deep CRM integration. Interestingly enough, HubSpot offers CRM for free with its marketing automation, which is a great way to compete against Salesforce in the lower end of the market.

Of course, Salesforce’s Pardot offering sits somewhere in the middle. There have been many improvements to the platform, but based on what customers are saying, Pardot is still behind Marketo when it comes to feature functionality.

Why Marketo is undervalued by the stock market

From a financial perspective, this would, of course, be a sizeable acquisition. Marketo has generated hundreds of millions in revenue, and is growing 40 percent year-over-year. Despite this track record, the market is really dinging its value, which is likely because of the company’s unprofitability, leadership changes, uncertainty around SaaS products, etc. Marketo’s enterprise value is currently $640 million plus $110 million in cash, and if you factor in a 25 percent premium, you’re looking at a price tag of just under $1 billion.

Although that certainly isn’t chump change, I’d argue that the market is favoring large, profitable software companies — many of whom have plenty of cash for an acquisition of this nature. Marketo, on the other hand, is trading at an all-time low of only 3x enterprise value to revenue, while other enterprise SaaS companies like Zendesk, New Relic and Salesforce are at 6-8x multiples, even in this market.

If you want to make headway in the CRM or analytics space, you need a solid marketing automation system.

This low multiple undervalues the strategic value of Marketo, one of the few SaaS companies with thousands of customers on five-figure annual contracts. Marketo has one of the most extraordinary ramps we’ve seen since Salesforce in terms of year-over-year revenue, growing from $1 million to $209 million over the past 10 years. The company’s incremental revenue is 2x its incremental sales and marketing spend in recent quarters (while it has also kept R&D costs roughly flat).

Looking at incremental annualized billings this year over sales and marketing spend from last year, Marketo’s “magic number” is 0.54, which means that each customer pays for itself in less than two years. It’d be better to see a payback of under 12 months, because many of its contracts have annual commitments. And given the amount of upfront work there is to set up a marketing automation system, it is reasonable to assume that a Marketo customer will stay on for at least a year and roll into a second year commit — paying back their associated sales and marketing spend.

According to my calculations, if Marketo dedicates more than a quarter of its sales force to going after the enterprise, it can bring this payback down to one year, which would significantly reduce burn and improve sales efficiency. Even though Marketo’s unprofitability has grown at the same rate as revenue, the company is still only burning about $6 million a month. And when you divide its revenues by 4,000 customers, average annual contract values (ACVs) look to be around $15,000, which feels low given the scope of the platform.

Marketo should be seeing more success with moving up-market. A large acquirer with stronger footholds in big companies would help it sell into that enterprise segment. By joining forces with one of the software giants to enhance its offerings, Marketo could boost upsell rates and ACVs, as well as close its profitability gap.

All of this demonstrates Marketo’s attractiveness as an acquisition target. If you want to make headway in the CRM or analytics space, you need a solid marketing automation system — the ultimate gatekeeper of the funnel. It’s the perfect trojan horse for tapping into CRM and co-existing with Salesforce.

A Marketo acquisition could be a great defensive move for Salesforce, but it would be messy culturally, given its competing ExactTarget/Pardot products. On the other hand, companies like Microsoft, Oracle and SAP are competing with Salesforce in the CRM game. If you’re one of those major players, you’ve got to ask yourself — how often do you get an opportunity like this?

Featured Image: Bryce Durbin

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Want to compete with Salesforce? Buy Marketo