How Madwire Reached 20,000 Customers and $500 ARPU Serving SMBs (Interview with JB Kellogg)

Introduction and COVID Impact on SMB Customers

Nathan Latka

00:00Hello, everyone. My guest today is JB Kellogg with a company called Madwire. It's a technology company that provides business management and marketing software and services for SMBs and franchises. Madwire was founded in 2009 with the mission of helping small businesses grow and their local communities grow. When JB came on the show last, they passed a $105,000,000 in ARR. That was back in 2018. JB, you ready to take us to the top?

JB Kellogg

00:23Sounds good. I'm ready.

Nathan Latka

00:24Alright. So the world has changed since we last spoke. How's COVID hit you guys in your SMB cohorts?

JB Kellogg

00:30Well, yeah, it definitely affected us. Luckily, we're pretty diversified, which is part of our strategy. We work with a lot of different industries and types of businesses, which is good, but the verticals like fitness clubs, restaurants definitely were impacted. So that affected us. A lot of those businesses essentially paused things temporarily. We actually told them to just to try to help them out. A lot of them are reactivating now, which is good, but there's still areas

00:56like California and stuff. We have a lot of customers there that are pretty tight, but like I said, luckily we're diversified. So some industries actually did better during this time period, such as e commerce. So that was helpful, about 35% of our accounts are e commerce. So there was some balancing there, but it definitely affected us for a couple months and we're starting to ramp back up now.

Marketing 360 Product Overview

Nathan Latka

01:17That's good to hear. That's good to hear. And so for people that missed your last interview we did together, just tease them real quick with the product. What do you guys help these gyms and these franchises do?

JB Kellogg

01:26Yeah. So our number one product is Marketing 360, which is a small business marketing platform and business management solution. So essentially within a singular platform, you can do everything to manage and grow the business from a CRM to payments like invoicing, recurring billing, e commerce, all the way into all the marketing related pieces like email marketing, social marketing, multi channel advertising, etcetera. So one platform, one login really allows you to do everything you need to

01:53do to manage and grow the business.

Comparison to HubSpot and SMB Market

Nathan Latka

01:55When I hear that description without knowing it's you and you're the founder of Madwire, I think HubSpot. I mean, you playing very much in the HubSpot space?

JB Kellogg

02:03Pretty similar to HubSpot, yeah, but more geared towards small business. So our customer is generally one to a 100 employees. That's kind of our wheelhouse. There's about 30,000,000 of them, so there's a lot out But it's truly the small business. HubSpot is one level up from that, so a little bit larger of a business, generally speaking. And then our platform also does a little bit more the types of things that a small business needs to do

02:29and is a little bit more comprehensive in that regard. But that being said, HubSpot can become more complex, so you can customize it maybe a little bit more. And then one thing that makes us different than really any company in the SaaS industry is we also have the talent component. So if you wanna build essentially an outsourced marketing team through the platform with us, you can actually do that too. We don't leverage third party partners or

02:53anything. We actually provide those services and marketing modules to the customer.

Nathan Latka

02:58So you actually have, there's a portion of your team that is full time dedicated to services to the customer.

JB Kellogg

03:03It is, and we've built technology to automate a lot of that on the backend, but what we're selling to the SMB feels like services because an SMB wants to buy services, but on the back end, we're using technology to increase scale and profitability. So you have a dedicated support person essentially when you add these marketing modules. When you're a DIY customer, you're using our shared support is kind of how that works.

Team Size and Engineering Headcount

Nathan Latka

03:28So tell me more about the makeup of the team. You just sort of teased support, but what's the total team size today?

JB Kellogg

03:34Team size is 500 people.

Nathan Latka

03:36500 folks. And how many of those are engineers?

JB Kellogg

03:3960.

Customer Count, ARPU, and Contract Value

Nathan Latka

03:4060. Interesting. And I guess if you're serving the SMB cohort, you have a high volume, lower ARPU sort of model. What is that ARPU typically? What are customers paying you per month on average?

JB Kellogg

03:52Per month on average? Well, we have 20,000 customers. So when you look at it globally, it's about $500 per month per customer, about 6,000 per year. That's globally, but we do have different segments of customers. So we have like the true DIYs, which are much smaller price points and then we have customers that have all the marketing modules that are much higher price points. So those average prices are much different, but that's how it is globally.

Nathan Latka

04:16That's impressive. And can I take that 20,000 customers times 500? You guys had like $120,000,000 run rate today?

JB Kellogg

04:22Yep. That's right.

Nathan Latka

04:23That's great. So, yeah, I mean, comparing that to where you were back in September 2018, you said you had about 10,000 customers and so you've doubled your customer base. Your average ACV then you told me was around 10,000. So that shrunk a little, which makes sense because you have way more volume and you've increased ARR from a 100,000,000 in ARR up to a $120,000,000 in ARR. Are you happy with all those numbers?

Profitability Goals and Rule of 40 Target

JB Kellogg

04:44Yeah, you know, we're pretty happy and, you know, we're still... We have a lot of reactivation still with some of these industries to get back on board and put us back on track. But we have targets about this time next year to be in that 150,000,000 range or so we feel pretty good about. So that's what we're kind of marching towards. And we've also really improved profitability over the last couple of years since we last talked.

05:06That's been a big focus of ours. So we're trying to get that into that 15 to 20% range here over the next year, which we think is very doable, which would put us, you know, we're trying to align to that rule of 40 kind of where our growth is gonna be that 25% plus area and EBITDA is right in that 15 to 20% area. So that's kind of our target.

Nathan Latka

05:27And where was it last year? What was profit last year?

JB Kellogg

05:31Very small, like about 1%.

Nathan Latka

05:331%. So how do you change and how do you try and add 10% or 14% to your profit margin this year, especially obviously during COVID?

JB Kellogg

05:44Big piece of it's through technology. So we launched platform, Marketing 360, a new version, here about eight months ago. And it's already really increased profitability because we've automated a lot of stuff that used to take a lot of manpower. So for example, when we onboarded a new account, was very labor intensive. And with the new platform, we have something called Smart Start, which is you click one button based on the vertical and it customizes the

06:10whole platform and automatically builds out the marketing journeys and everything for you. So now it takes no human effort. So right now our 500 people is like 60 in tech. We have about 200 in sales. Then we have

Nathan Latka

06:10All of All have quota,

JB Kellogg

06:10yep.

Nathan Latka

06:26Wow.

JB Kellogg

06:27Yep, 200 in sales. We have a 100, which is acquisition sales and a 100, which is retention sales. So they're upselling, cross selling. And then we have about 40 back office and

06:39the rest is support. So when you think about 20,000 customers, our support team's actually pretty small. Our account per person ratio now is about 50 accounts per person, which is better than HubSpot and Sprout Social.

Nathan Latka

06:51Per support person?

JB Kellogg

06:53Per, yeah, well, person as a whole. Support person, Even got more, yeah. Yep. So all those things we've been really improving upon to increase profitability overall. And we've started offering more usage based things like we've offered payments now. So Shopify, I mean, their success story, you know, really triggered off of when they added payments. So we have payments now where you can manage your invoicing, recurring billing, etcetera, in the platform. That's additional revenue, you know, that

07:21we're receiving every month on top, which really helps with the profitability piece.

Payments Product Launch and Adoption

Nathan Latka

07:25In July, how much GMV did you process through your payments?

JB Kellogg

07:29Through our payments? Well, it depends. We have legacy payments accounts, which are more of like an ISO model because we acquired a company called SilverEdge two years ago. So with them, it's close to 1,000,000,000, but if you exclude them just look

Nathan Latka

07:29Annually?

JB Kellogg

07:29At Yeah, annually, yep. If you exclude them and look at just our new payments products, it's very, very new. So it's only been launched for about a month at this point. And so what we're

07:56seeing so far is 65% adoption rate. So users buying Marketing 360 right now, but 65% are activating payments. And the average ticket size so far has been pretty good. It's actually been close to $1,000 because we have HVACs and those types of businesses that are using it. So for example, if you have $1,000 invoice paid, we make about $30 on that. So it adds up pretty fast and this is additional revenue that we didn't capture

08:24before.

Nathan Latka

08:25Got it, so what is that point? You're taking 0.3 fee basically?

JB Kellogg

08:28Yeah, 2.9.

Nathan Latka

08:302.9. How do you make the margin on that work though? Because usually, I mean, Visa's taken 300 basis points and if you're charging 300 basis points, where do you squeeze margin out there?

JB Kellogg

08:38Yeah, you recognize the gross, it's how Shopify does it. We do it the same way. So you recognize the gross and you record the net. So the net improves with volume. We're using Stripe. So we're using Stripe just like Shopify. So it's exactly the same way Shopify does everything.

Nathan Latka

08:56Got it. So what you're saying is even if you don't make any money on the payment thing right now because the full 3% that you're recognizing is being paid out to... Oh, sorry, sorry. Are you taking 63% is one of these and 3% is actually gross revenue on your profit and loss?

JB Kellogg

09:13No, it's about 2.9% total and then you have all the card fees and everything. So at the end of the day, you're gonna make a margin off of the 2.9, which improves over time is how that works.

Nathan Latka

09:25I see, I see. But what I'm saying is that margin is gonna be something like 0.05, it's very, very small.

JB Kellogg

09:31Yeah, yeah, it's like five basis points kind of thing, yeah.

Nathan Latka

09:34Yeah, yeah, but with volume, obviously it can get big.

JB Kellogg

09:37Right, and we're hoping to see most of the impact actually with stickiness and churn because customers using those types of products and features within the platform, they just generally never cancel. I mean, they're doing all their billing, especially if it's recurring billing, it's just so painful to move that we expect the churn to improve, you know, double the improvements of churn over the next twenty four months, call it.

Logo Churn, New Customer Churn, and Net Revenue Retention

Nathan Latka

09:59When we first met, this was the biggest thing about your model that just shocked me. You know, I've interviewed thousands of CEOs, I had never heard metrics like this because what you told me was you were spending $3,000 to get a new $10,000 a year customer. Nothing wrong there. Three month payback period is super healthy. But you then told me that your your percent, your gross revenue churn annually was about 90%. And I said, well, holy

10:22cow, that's way too much. And you said, well, Nathan, our payback is so quick and what happens is of a cohort of a 100 that signed up last month, we know two years from now that even if only five of those customers stick, they're gonna have 10 x the price, We're gonna upgrade them 10 times. There's gonna be huge accounts, which makes up for that loss. Is that all accurate and true? And if so, what does

10:41that look like today?

JB Kellogg

10:43Today, we're... Our logo churn on core customers, which a core customer is a customer that's been with us twelve months or more, is about 2.8% per month. And we expect that to improve to about 1.5% over the next twenty four months with payments and some other business management tools that we've built into the platform. Our new customer segment, which is zero months up to eleven months, essentially, those are new customers. They churn at a higher rate.

11:10So it's not 90%, it's improved quite a bit from there. It's more like 50%. Make it to that twelve month mark. But like you just said, the 50% that we lose, we're making up for with growth out of the 50% that we keep. So with a small business, you're just never gonna have a great churn rate in the first twelve months because 80% of small businesses go out of business in general. So you're really defeating the

11:34market if you're doing better than that, which we are. But the key is not necessarily keeping every single customer, it's about growing the customers that find success. And so that's what we've done pretty good at is when we find success with the customer, we're able to grow the customer and then that makes up for the losses, so the MRR churn is better.

Nathan Latka

11:51So when you look at your full recognized revenue today, what is expansion in revenue percentage on historical cohorts?

JB Kellogg

11:59Well, how long of a cohort?

Nathan Latka

12:02Long? So, of the revenue you had exactly one year ago in that customer base, obviously you lose a portion of those, but then you upsell as well. What percent are you upselling? 10, 20, 50, 100% upsell?

JB Kellogg

12:14Over a 100% of the loss, yep. For the core customer segment, that's all we track at that point. So it comes down little bit into month 18, and then month 18 and beyond, it actually grows larger than it was in month 12.

Nathan Latka

12:29Just to be clear, if each month you're churning 2.5 to 3%, so annually that's 36% revenue churn, what you're saying is your expansion on that same cohort is more than 36%. So your net revenue retention is greater than 100% in the first eighteen, twenty four months.

JB Kellogg

12:43Right, yeah. The two point eight percent's logo, so we're losing 2.8% accounts.

Nathan Latka

12:49What's the revenue churn?

JB Kellogg

12:49After

12:51the twelve month period, the revenue churn is in the core customer, it drops for a little bit from month 12 to 18, and then at month 18, it climbs back up to the high point of month 12 and actually grows beyond it. So that's where you get that 100% plus retention on the revenue churn.

Nathan Latka

13:11What is revenue churn annually? That's what I'm trying to get at on a gross basis.

JB Kellogg

13:17Well, that's what I'm saying for the core customer, it's positive.

13:23It's positive.

Nathan Latka

13:23The gross churn can't... Yeah, yeah, I get that. But peel back that onion, there's two components to revenue retention. One is gross churn and then there's expansion revenue. When you add them together, what you're saying, and I hear you, is you have greater than 100% net revenue retention. What I'm trying to understand is before you add back expansion, what is just gross revenue churn on historical cohort?

JB Kellogg

13:44Don't I'd have that have to look because we have so many, we have 42 plus cohorts now.

Nathan Latka

13:50I can tell you do a measuring lot because you're very specific with how you answer these. You clearly do a lot of cohort tracking.

JB Kellogg

13:56Right. Yeah. So you'd have to look what does it look like for the, you know, cohort for month 14, you know, that kind of thing. Yeah. So I don't have the total aggregate off the top of my head. I'd have to

CAC and Capital Raised

Nathan Latka

14:05No worries. Are you still paying out $3,000 to get a new customer?

JB Kellogg

14:10Yeah. It's right. It's between 3 and 4,000 depending on the month.

Nathan Latka

14:14Very cool, man. And again, what's most impressive to me about what you've built is you've done this for... With raising relatively small amount. You had about 7,500,000 raised last time we spoke. Have you raised any additional capital?

JB Kellogg

14:24We've not.

IPO Plans and SPAC Consideration

Nathan Latka

14:25That's great. Really, any plans to?

JB Kellogg

14:28Right now, we're kind of thinking if we continue improving on our platform and our numbers and metrics and just our business in general, we think that we have a good opportunity at IPO in the next, call it twelve to eighteen months. That's kind of our target right now.

Nathan Latka

14:42And you think you'll do traditional IPO or direct listing or look at a SPAC or something else?

JB Kellogg

14:47We've looked at SPACs. That's really interesting to us actually, but right now we're kind of focused on traditional.

Nathan Latka

14:54Interesting, very cool. And why would you do that over just staying private and doing a rev share, you know, your employees?

JB Kellogg

15:01That's an option too. And that's the nice thing is we don't have to do anything. We just feel like there's opportunity right now. The market's pretty hot. You know, Sprout Social was very successful. BigCommerce, we work with actually quite a bit as a partner. They were very successful just, you know, a week ago. So we feel like it's a good time in the SMB space with technology, which we feel like we're the leader in for SMBs.

15:23So, you know, why not go that route and kind of be a transformational company is kind of our thinking right now. But like you said, we don't have to, so things could change.

Famous Five: Books, Tools, and Personal Life

Nathan Latka

15:32Profitable, a relatively little raised, team of 500 strong, it's all good stuff. Let's wrap up, JB, with the famous five. Number one, favorite business book?

JB Kellogg

15:40Good to Great.

Nathan Latka

15:41Number two, is there a CEO you're following or studying?

JB Kellogg

15:45Not right now.

Nathan Latka

15:47Number four, is there a favorite online tool you've got for building Madwire?

JB Kellogg

15:51We use Marketing 360, we use our own product.

Nathan Latka

15:54No, come on, besides your own.

JB Kellogg

15:56We actually do, but I'd say right now, I mean Zoom. Mean Zoom. Yeah. We moved to Zoom like literally a month before COVID, so it was perfect timing. We have everything on Zoom, call chat.

Nathan Latka

16:05So anything.

JB Kellogg

16:06You know, everything. So it was awesome.

Nathan Latka

16:07How many hours of sleep break in every night?

JB Kellogg

16:10About seven.

Nathan Latka

16:12Okay. In situation, married, single kids?

JB Kellogg

16:14Married, three kids. Have four kids, four kids.

Nathan Latka

16:19Four kiddos and how old are you?

JB Kellogg

16:21I just turned 40.

Biggest Lesson: Act Faster

Nathan Latka

16:2240, last question. What do you wish you knew when you were 20?

JB Kellogg

16:25What did I what?

Nathan Latka

16:26Wish you knew when you were 20.

JB Kellogg

16:30I wish I knew everything I knew right now. If I could start over, I could go 10 times faster. I would say that.

Nathan Latka

16:36Give me something specific.

JB Kellogg

16:38What is the specific thing I wish I knew? Let me think about this for a minute.

Nathan Latka

16:48Start thinking about where you were when you were 20. What were you doing?

JB Kellogg

16:52I'd say what I wish I knew when I was 20 was just to act faster because I actually knew the Madwire business model would work at that time, but I really didn't put the gas pedal on it till I was 27, really, 28. So there was eight years there where I could have really captured a lot of market share if I just jumped on it earlier, but I didn't. So I'd say I would have acted faster.

Nathan Latka

17:15Guys, there you go, Madwire. A full suite for SMBs to handle all of their marketing. They've grown from $100,000,000 run rate to $120,000,000 run rate over the past twelve to twenty four months. They are profitable, hoping to grow profitability about 15% to the bottom line this year. It would not surprise folks when they're looking at it, potentially doing some sort of IPO in the next twelve to twenty four months, but again, don't have to do it

17:35because they are profitable and have raised relatively little capital to $7,500,000 raised serving 20,000 small business customers. JB, thanks for taking us to top.

JB Kellogg

17:43Yeah. Thanks, Nathan. I appreciate it.

Nathan Latka

17:47One more thing before you go. We have a brand new show every Thursday at 1PM central. It's called Shark Tank for SaaS. We call it deal or bust. One founder comes on three hungry buyers. They try and do a deal live and the founder shares back end dashboards, their expenses, their revenue, ARPU, CAC, LTV, you name it, they share it. And the buyers try and make a deal live. It is fun to watch every Thursday, one

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