Playing the Power Shift to the CMO

Over the next 5-years, the marketing department is expected to spend more on technology than the IT department. This dynamic could create a shuffle in the C-suite during this time period that might impact the decision making process for software developers.

The forecast by research firms such as Gartner that the chief marketing officer, or CMO, will become more important than the chief technology officer, or CTO, by 2017 is already starting to impact the development plans of software firms. The very real possibility exists that CMOs will seek alternative ways to buy technology, such as partnering with outside vendors rather than with the CIO. Software firms must adapt to not only the marketing department needing advanced analytic technology, but also the CMO might lead the buying decision making.

In order to prepare for that expected shift, firms from Salesforce.com to Adobe Systems have made large purchases of marketing firms. Salesforce.com spent a significant $2.5 billion on ExactTarget and Adobe bolstered its position with a $600 million purchase of Neolane, which sells ad-campaign software. So while some of the bigger firms have been bought out, a couple of interesting stocks remain: Responsys and Marketo . These marketing cloud software firms offer huge potential rewards, but major risks exist after the stocks have made large runs this year.

Best of breed solution
The age old adage that customers, whether businesses or consumers, prefer a complete stack approach over a best-of-breed solution will once again be tested in the marketing cloud area. Oracle has absorbed Eloqua into its solution and stack so now customers can choose whether to obtain all CRM needs from Oracle or best-of-breed by pulling in Salesforce.com for sales and Marketo for marketing. Typically customers want best-of-breed solutions unless the products aren't differentiated. In that case, firms such as Responsys and Marketo have the opportunity to compete in a market where the large enterprises such as Adobe Systems and Oracle compete. The ability to have a focused solution can typically win out in the early days when products are being developed and before reaching critical mass.

Forging partnerships
Marketo is a leading cloud-based marketing platform for companies to build and sustain customer relationships. The company focuses on being the marketer to marketers with the goal of maximizing customer loyalty and lifetime value by improving sales effectiveness and providing analytical insight into the contribution to revenue growth of marketing plans via social marketing automation. The company offers several solutions including Marketo Lead Management, Marketo Social Marketing, Marketo Sales Insight, and Marketo Revenue Cycle Analytics. It also has a highly interactive community of over 30,000 marketing users that collaborate in the Marketing Nation plus over 150 partners in the Marketo LaunchPoint partner ecosystem.

The products are clearly drawing customer attention leading to 62% revenue growth in the latest quarter. In addition, the advanced marketing solutions have attracted over 2,500 customers. As with most cloud software firms, the company isn't profitable yet, but the recent growth rates should have it on a solid path to long-term profitability. The only concern is that at a market cap of $1.2 billion, Marketo has a very rich valuation for a company only expecting $90 million in revenue this year.

Years of digital marketing experience
Responsys is a marketing cloud software and services leader that has a considerably larger corporation footprint than Marketo, but the company actually has a smaller market cap due to slower growth. It started as an email marketing platform back in 1999 and now provides a digital marketing suite via the Responsys Interact Marketing Cloud that delivers the right marketing to their customers across email, mobile, social, display and the web. The company appears to lack the breadth and quality of the partnerships obtained by Marketo. Responsys though can brag of a highly respected retailer, Ascena Retail Group, claiming a 40% revenue lift from a marketing program orchestrated by the company.

With revenue expected to grow 21% to reach nearly $200 million in 2013, Responsys isn't garnering the extreme growth of other cloud software stocks. The revenue growth is respectable and the company is actually profitable, which isn't common in either the advertising or marketing segments.

Bottom line
Though a firm such as Responsys has been around for 15 years, the marketing cloud is only now garnering attention. Recent large buyouts have some of the software industry leaders competing in the sector now, but if the CMO of Marketo is correct, the market for marketing exceeds that of CRM. Remember that CRM is an industry that Salesforce.com has used a dominant position to forge a market cap of over $31 billion. With the technology buying shifting to the CMO, these marketing focused software stocks could be at the forefront of multiple years of substantial growth. Plenty of risks exist from the shifting landscape of larger competitors and possible new C-suite buyers, but these small innovators are likely to get their share of the marketing technology budget.

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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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