Derrick Wood, Software Analyst speaks with Bill Bird, Head of Thematic Research about customer data platforms (CDPs), one of the highest-growth sub-sectors in software. This is the first episode of Cowen’s Thematic Podcast Series which focuses on emerging growth and disruptive innovation. Press play to listen to the episode
The cookieless world is becoming a reality. When Google blocks all cookies, this will be it for cookie-based advertising. It will be over. We marketers will have to use other applications.
Hello everyone, and welcome to Cowen’s Thematic podcast. I’m Bill Bird, Head of Thematic Content at Cowen. And I’m really excited to be here with Derrick Wood, senior software analyst at Cowen. Each month our Thematic podcast will discuss areas of emerging growth and disruptive innovation, topics that are a pivotal interest to investors and corporate executives. The raw materials for the themes will unpack, or Cowen’s proprietary data sets, and Cowen’s ahead of the curve series where so much of our thematic work is expressed throughout the year.
Today’s topic is software, and more specifically, customer data platforms, which are one of the highest growth sub sectors in software, and where Cowen believes the market has hit an inflection point. But before we dive in, some background on Derrick Wood. Earlier this year, Derrick published a comprehensive report on customer data platforms, characterizing CDPs as the next evolution in the CRM marketing and customer engagement space. Derrick is a veteran software analyst, having covered the sector for more than two decades. He joined Cowen in 2016 and he covers the enterprise software sector, including SaaS, big data and analytics and DevOps, Derrick, welcome. And thanks for joining us.
Derrick, let’s start with the basics. How do you define a CDP?
Yeah. CDP or customer data platform, I think of it as a database-like system that collects and processes and analyzes a lot of unstructured data from digital customer interactions. And when I say digital customer interactions, we’re talking about web behavior, like what are they clicking on. How much time are consumers spending on different pages. Affinity for different content. It could be social interactions on social sites. What they like. Who their followers are. It could be demographic information, gender, age, where they live, their hobbies. It could be their activity on emails, emails opened, ads clicked, call center data, just lots of unstructured interaction data that CDPs will ingest and store and prepare so that other applications can use that data, whether it be an AI, ML, algo tools or execution engines.
And it’s got some similarities to the cloud data warehouses, but I like to think of… They’re really in two different camps, cloud data warehouses, like Snowflake. They’re much more oriented around structured data. The use cases are more around internal business decision making, internal operations analysis. Whereas CDPs, again are much more about unstructured data and used for facilitating external communication. And certainly in the B2C world when you’re talking about marketing and how do you drive personalization and outreach across different channels, whether it’s email or mobile or content personalization on websites. It’s all about facilitating personalized engagement externally.
And Derrick, let’s zoom out to the overall marketplace. How do you think about the size of these dressable opportunity, and what kind of growth rates are you seeing?
We’ve seen a lot of different studies. I think that the best one we’ve seen is for market and markets, and they pegged the CDP market to be about $3.5 Billion in 2021, growing to $15.3 billion in 2026. And that’s a 35% [inaudible 00:04:20] . So as you had mentioned, one of the highest growth sub sectors and software. And I think it’s a lot larger when considering the application ecosystem that CDPs touch. Braze is a company that has built marketing automation applications that integrate well with CDP data flows, and the marketing automation space in of itself is already sized up as about a $20 billion TAM. So it’s adjacent, it’s augmenting CDPs. You could argue when you bring in those other kinds of applications that really monetize CDPs, that the markets bigger and could be as big as $60 billion. One other estimate was from Twilio when they acquired Segment. And they had said today, the market’s worth $17 billion, but only $2 billion is really spent on already packaged CDP platforms. Whereas the rest of the $15 billion is considered to be DIY.
So that goes to show it’s very much a green field market around how to collect all this data and monetize all this data. Because obviously, digital transformation has just a created so much, so much data and there’s a lot of variety and velocity and it’s hard to harness all that. And that’s what these new CDP vendors are trying to do. A lot of companies have for a while, tried to do it on a do it yourself basis, whether it’s maybe having used Hadoop or some other technologies that were more difficult to use. But I think that anyway, you slice it. It’s a large market. It’s early, but is fast growing. And a lot of companies we’ve talked to, over the last couple of months or view this market ready to hit much bigger inflection over the next couple years.
Let’s turn to the competitive landscape. Who are the major players here, and who are some of the companies to watch?
Yeah. I think it helps to think about the landscape, and if I lay it out for you a little bit, and I like to compare if you’re familiar with the traditional data warehousing BI stack, at the bottom of the stack you’ve got the ETL vendors that are the data ingestion data transformation part of the stack. Then you have the actual data warehouse platforms that will execute a lot of the query processing. And then you have the BI vendors that are much more kind of the front end applications for visualization and reporting. That stack’s been around for a long time.
And the ecosystem that’s developing and CDP has some similarities. At the bottom end of the stack is the data ingestion and the data management. And that’s where core CDPs are. Segment is the leader in that space that was acquired by Twilio at the end of 2020 for $3.2 billion. And there’s a couple others, Tealium and mParticle, and Treasure Data would be a couple others that are in that pure data side of things. And so again, they are the ingestion engine, the transformation engine, and then they facilitate sending off that data or preparing it for some other stage.
The second stage, the second layer in the stack would be, it’s not quite clear, but it’s more like where the analytics happen, where the journey orchestration happens, where the personalization happens, and really kind of making intelligent sense out of the data. And that can be AIML tools, it can be companies like Pendo or Amplitude, that are doing product analytic, product usage analytics. It can be the CDP vendors or it could be the app vendors. And that’s kind of the third layer. The app vendors are the ones doing the campaign execution, the activation of the data. That’s where you’re going to see a company like Braze or Iterable or Klaviyo or some of the newer vendors on the scene.
And so that’s what the ecosystem looks like. Now, of course, you’ve got some of the bigger players out there. We talked about Twilio, now they bought Segment. They are big player in the market. They are now moving up stack, not just being in the data management layer, but they have a new marketing automation application coming out called Engage, which will come GA sometime this year. Of course, you’ve got Adobe and Salesforce that jumped into the CDP market back in the 2019, 2020 timeframe to augment their marketing automation applications. Adobe was first to market, I think in 2019, that’s called their realtime CDP. And that integrates well with their broader marketing automation and marketing app portfolio. Salesforce was about a year later, and we don’t really have too many stats on Salesforce yet, but they’re using their CDP for their marketing apps and also to connect data across their whole application portfolio, whether it’s sales or service or commerce and get more cross channel personalization and cross channel customer profiling.
Oracle, SAP, Microsoft, all have some sort of element of CDPs, but they’re not too focused on it. And Braze just recently came public, which they do not have their own CDP, but they work well often with companies like Segment and Tealium, and they do have their own AIML engines, and they do produce a lot of their own data in terms of what they’re collecting and how they’re interacting at the front end with their execution engines.
So it’s an interest steam space. It’s evolving. There has been a lot of hype. In our note, we talked about how a year ago, there’s about 150 companies that said they’re in the CDP market, and there’s some truth that, and some not, and some have been acquired. And some CDP vendors are packaging CDP with their applications. So Klaviyo does that. They’re still in the private market, and a company called Bloomreach does that, bought a CDP vendor, married it up with their e-commerce personalization apps. And so you’re seeing some convergence where the app vendors want to also own the data management layer, which Adobe and Salesforce do, but you’re starting to see that in the private market too. So it’s a fascinating space. It continues to evolve, but hopefully that helps on the landscape there.
Very helpful, Derrick. When you look at the product in the marketplace, what are the benefits and challenges of CDPs?
The benefits of course, what you’re trying to do is create a profile of a customer, a profile, and as much as you can on a one-to-one basis, deliver personalization of content to that customer. But you’re trying to understand what they’re doing across channels. What they’re doing across your website, your mobile apps, your digital services, point of sale transactions in stores, call center interactions, and take all that data and build a persona about somebody. And then that helps, particularly in marketing, target promotions and content and merchandising. And ultimately, if you do that that’s the holy grail, one to one personalization. And you optimize brand affinity, you optimize revenue conversion, and cross sell, and you lower churn. And there’s a very big ROI, because it’s a revenue event. And obviously you hear all this, and it sounds super complicated and it is, with all the data that you need to harness.
But what these vendors are doing is they’re trying to take that data and you segment customers, you build prediction models and you build personalization and you try to automate all that. And then engage with customers across their preferred channel. Whether again, it’s email or mobile or web visit personalization. And it’s certainly an advancement from older technologies, old technologies, each one of those are silos, your call center system, your CRM system, your email marketing system. You’ve got data stuck in relational databases that are siloed and you can never get really great insight cross channel to build personas about customers, and especially today where there’s so much multichannel interaction happening.
And so that’s what most of the landscape looks like today, is just siloed data. It’s batch processing. It’s disparate data flows, and apps are not connected. CDPs try to tackle that, move from manual data collection to automated data collection, get omnichannel engagement, move from batch processing to real time processing, and unify apps up and downstream. And the ROIs are certainly very attractive. I think Braze had a study, maybe it was Forrester that did a Braze study where there’s 840% ROI on a handful of customers. They reduced churn by 50% on average, marketers on average save thousands of hours for campaign efforts. And I think you can just think of any kind of ROI out there that saves time or generates more revenue or more brand affinity i what the end goal is. And then of course, and it’s getting, and I think we’ll talk about this in a second, but it’s getting harder for marketers and advertisers to leverage and monetize third party cookies, and that’s driving more companies to figure out how to harness first party data, what consumers are doing on your own websites and apps, and monetize that.
Derrick, you raised a good point about the things happening around data privacy. How will this shift away from third party data and cookies impact CDP adoption? It sounds like it could be a big accelerant.
Yeah. And there’s some interesting things going on right now, actually there’s a big crackdown on big tech being able to track what you’re doing on websites and then having other vendors, if you’re in the iOS ecosystem on a mobile phone, and your downloaded app, before these IDFA changes you’re able to track a lot of what users are doing on the Apple platform. And certainly Apple can do that.
And it’s really going to have an impact. And we’ve already seen it on the ad tech space, in this past quarter or two, you saw a big slow down and growth from some of the ad tech vendors. So they’ve had a serious disruption from these changes, and how deep of an impact it’s going to be, I think it’s still unknown. But at the end of the day, this is going to drive more… Again, advertisers and marketers are going to have to figure out new ways to monetize online interaction data. And that’s exactly what CDPs do. And again, that’s first party data.
And first party data, it’s certainly harder to collect and really harness. Third party data tracking cookies, segmenting users on, well, this person’s been shopping for a car. So I know I can sell this data to people that would care about that. That’s unknown data that’s easy to do. We’ll be following what happens with legislation and how many workarounds there’s going to be with the new IDFA changes. But first party data is the holy grail right now. And we think that budgets are just going to continue to shift that way.
As a proxy for where the market may be headed from a customer perspective, how are the more sophisticated enterprises leveraging CDPs?
Direct to consumer, post COVID has been a big push. I think one group of sub-sector out there that has been interesting to watch is the like quick service restaurants, Pizza Hut, Taco Bell, Burger King, Domino’s, they got disenfranchised from their customers, or you could be, if food delivery companies are the touchpoint and not the actual restaurants. But obviously when COVID hit, people weren’t going into restaurants. And so those companies tried to figure out how do I digitally transform? How do I really try to directly engage with consumers?
And so all those companies have been really trying to embrace CDPs and new ways of trying to reach consumers. I think Pizza Hut, in terms of trying to create direct relationships digitally, they built mobile apps, they built games, they brought out loyalty programs. And as you download their apps, you start to get a lot more interaction data. Then you can do more personalized communication. They did stuff like using Twilio to message, our pizza’s ready, or the pizza just went into the oven, and the pizzas ready, and the driver’s on its way. And just kind of built this journey of engagement with consumers directly. And Burger King, another one, it was pretty interesting, they offered like a penny for a Whopper, if you downloaded an app and turned on your location tracking. And then they would send a promotion if you actually went by within 600 feet of a McDonald’s. And that would steer their way from McDonald’s to Burger King. So, interesting kind of approach of how to leverage data.
And another one I saw that was interesting was AB InBev and their digital transformation. They operate in 50 countries, they’ve got 1,000 different data sources, 500 different brands, they’ve doing $50 billion in revenue. And there’s a case study on how they used to rely on third party data for segmentation and targeting and ad spend. But it was disparate. They didn’t have it centralized in one place. They didn’t have compliance rules in place around how the data was being collected and shared. So they’ve turned to CDPs to harness all that, and really bring in a central location for all their data collecting, move away from third party cookie tracking to first party tracking.
And it’s been a pretty interesting journey, that was with Treasure Data, one of the core CDP vendors out there. And one quote, just to get a sense of how they view the CDP is, “One of our marketing goals shared among all of our countries is to speed up the use of first party data. Not just because now we have large amounts of consumer data inside our platform, but also because the cookieless world is becoming a reality. When Google blocks all cookies, this will be it for cookie-based advertising. It will be over, we marketers will have to use other applications and other approaches.” So, that goes to show the big movement they’re making away from third party to first party. And CDP is a key element for that.
Very helpful, Derrick. As you think about CDP’s competitive impact on the marketplace, what areas of the MarTech stack could CDP steal share from?
Data management platforms are certainly getting cannibalized. Those are platforms that would collect all this cookie data and create segmentations for advertisers to do broad based digital advertising. And Adobe, Oracle, and Salesforce all went through an M and A spree on the DMPs in the 214, ’15, ’16 timeframe. When GDPR hit in 2018, I think it was, there was some severe impact to these DMP platforms. And so they have bend under pressure for a number of years. I think they’ll be under even greater pressure going forward. So it’s interesting because all those vendors I listed also have CDPs, and they have basically pivoted to CDP. So they’re cannibalizing themselves a little bit, but in the effort of where the dollars are going to go to, and they have those products as well.
Legacy marketing systems, I think are also going to be at risk, whether it’s email, legacy email system, like Mailchimp that was bought by Intuit recently. Even Salesforce bought ExactTarget, it’s a legacy product email centric and built on batch, and not well integrated with the CDP, and same with Responsys that was bought by Oracle, or Emarsys that was bought by SAP.
So, those guys have some of the new stuff and they have some of the old stuff. But there’s a lot of pure plays that are really just focused on brand new architectures. And those are the ones that are going to be disruptive to those legacy stacks. And I think on average, we hear that organizations use like 20 or 30 different marketing technologies. So there’s a ton of smaller point tech that could see share losses. The MarTech stack, I think there’s maybe 7,000 MarTech companies in the broader ecosystem. So there’s a lot of small point vendors out there that could lose share.
And then when it comes to like I started with, CDPs are data warehouses. And so right now the cloud data warehousing vendors are actually working well with CDPs, because it’s kind of a different type of data set. So they flow data back and forth in between each other. But one thing to watch is whether each one of those will encroach on each other. Right now they’re in two different swim lanes, but we’ll see down the road. So hopefully that’s a good flavor.
Derrick, as you gauge the development of the market, what are the things you’re watching?
IPOs of new companies coming out that are CDP oriented, Klaviyo is one that I talked about, it actually built itself first as a database and a CDP. And then they pivoted to being a marketing automation system. And so they’re one of the few that have both integrated together already from the start. And they’re a fairly big company. I think the last valuation was $9 billion or $10 billion in the private market. So that’s going to be interesting. Could be this year. Bloomreach is another one that is more focused on e-Commerce personalization that acquired a CDP recently, and is trying to bring the two worlds together as well from an eCommerce perspective. So the IPO world, certainly something we’re watching.
The legislation, as I mentioned, there’s a bill aimed at banning targeted advertising. The discussions just kicked off this week, and the legislation is trying to prohibit advertising facilitators from targeting ads. And how successful this is, I don’t know, but we’ll watch. And then even like CDPs making their way into the sales application world. Most of what we’ve been talking about today is around marketing applications using CDP data.
But the other new world could be around sales applications. And what I call sales intelligence or revenue acceleration and taking a lot of unstructured data, a company that’s doing that is gone, and they’re taking your voice data and your call data with customers and doing a lot of AI around it, and then understanding who are the best sales reps and why, and then taking that knowledge and trying to apply that to your broader sales force around best practices. And that’s all around collecting a lot of unstructured data, running AIML algos around it. And a CDP would be a good data collection platform to do that. And so CDP is making their way to the sales apps world could start to percolate it as well.
Twilio just announced its annual CDP report, we’ll be digging into that to see what kind of insights they’re trying to bring out. But we did see that Snowflake was one of the fastest growing apps on Segment. So that does show that data warehousing and CDPs do have a lot of synergies together. But there’s a lot of wealth of data in there. And hopefully more to learn.
Derrick, before we wrap, one final question. What are some of the marquee events or expert calls that you have coming up or plan to host related to this thematic?
So Adobe’s hosting their marketing summit in a couple weeks. I was hoping it was going to be in Vegas. So we have a chance to really talk to people live on the floor, but it’s going to remain virtual. But in terms of what they have to say on their vision of CDPs, because it’s a big focus for them, and what kind of new products and capabilities they’re rolling out to market, we’ll certainly be watching. John Blackledge is a colleague, covers internet companies, and he’s been doing expert calls and surveys around the impact of the iOS changes in IDFA. I think we’ll look to do more surveys and more expert calls, and I’ll probably be more involved now that the disruption in his world could be a benefit in my world in terms of pushing more investment to CDPs. We’re going to be doing a lot more work on how CDPs could start to move in into sales applications as well. So stay tuned for that.
As we wrap up today’s podcast, I want to thank Derrick for sharing his thoughts, and everyone for taking time out to listen. Be well and take care now.
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