Here Are The Key Factors Impacting Constant Contact’s Customer Growth Rate

Constant Contact (NASDAQ:CTCT) provides engagement marketing tools such as email marketing, social media marketing, event marketing, mobile storefronts, local deals and survey products for small businesses. Its customer growth rate has declined over the past few years from 44% in 2009 to around 30% and 13%, in 2010 and 2012 respectively. The decline can be attributed to rising competition in the market as well as challenges in the free to pay conversion rate.

We believe the company’s customer base will expand at about 10%-11% over the next few years, driven by factors such as high market potential, expansion in product portfolio and partner distributor channels, as well as cross-selling of products. In the long run, we expect its customer base to reach 1 million as compared to 585,000 unique customers at the end of Q3 2013. In this article, we highlight the key factors that will impact Constant Contact’s customer growth rate in the future.

Check out our complete coverage of Constant Contact

Drivers

Significant Market Potential

There are more than 29 million registered small businesses and non-profits in the U.S., and hence we believe there exists significant scope for the company to expand its customer base. Additionally, since the company derives only around 10% of its revenue from countries outside the U.S., hiring more regional development directors and opening more marketing offices internationally will help the drive the company’s customer base.

Expansion In Products And Services

Constant Contact has added various service offerings in the last few years which could enhance its customer growth rate in the future. In 2012, the company added new services such as Social Campaigns, that helps customers run marketing campaigns on Facebook, as well as SaveLocal, that aids small businesses in providing local deals. The acquisitions of CardStar and SinglePlatform last year also expanded its customer base. SinglePlatform, that provides local businesses a single platform to update their business details, contributed around 15,000 paying customers to the company at the end of 2012.

We believe these new services, which were introduced in 2012 will continue to gain popularity and fuel Constant Contact’s customer growth. We believe the company will continue to broaden its service portfolio in the future, to cater to changing trends in its industry.

Bundling of Products

Constant Contact is making efforts to transition into a multi-product company, such as bundling its products on an integrated platform and merging its different sales forces. It recently launched an upgraded contact management functionality and it is trying to boost customer migration towards this platform. It is also testing several pricing and packaging strategies for its integrated suite of products in the second half of 2013. We believe this will help the company in expanding its customer base.

Expansion In Partner Distributor Channel

Constant Contact currently markets its products using various means such as online advertising, partner relationships, television and radio advertising, regional initiatives, referrals and brand awareness. It has collaborated with more than 9,500 local and national establishments, and we expect the company’s efforts to enhance its marketing and partner distributor channel to positively impact its customer growth rate.

Customer Retention Rate Is High

The company’s monthly retention rate of unique paying customers was seen at around 97.8% in 2012. We believe this percentage could rise in the future as the company continues to cross-sell its products and optimize its data analytic capabilities.

Barriers

Rising Competition

The market for online marketing tools is fragmented and characterized by intense competition. However, Constant Contact’s competitive advantage lies in its ability to provide a broad range of products and services. Certain competitors have begun providing email marketing services at much lower prices, and this could impact the company’s customer growth rate. ^[1]

Weakness In The Economic Recovery Could Impact Customer Growth Rate

If the ongoing economic recovery weakens in the future, then it would hurt Constant Contact’s customer growth rate as small businesses are impacted more in the times of economic recession, which limits their spending power on marketing activities.

Our $21.15 price estimate for Constant Contact’s stock, is approximately 25% below the current market price.

Understand What Drives a Stock at Trefis

1. Email marketing provider ReachMail targets rivals Constant Contact, iContact with ‘This Means More!’ campaign, PR NewsChannel, January 30, 2013 [↩]