Here’s what I learned this week

I was a therapist last week, I’m not a fan.

If there’s one thing that really bothers me it’s lack of ownership.

If there’s a problem, fix it.

Roll your sleeves up and teach yourself how to fix things.

A lot of this generation is getting softer, they want everyone to fix their problems for them or tell them exactly what to do. The art of being able to evaluate problems and work through solutions is being lost.

Which brings me to the topic of this newsletter, my friend Adam Kitchen’s post on LinkedIn last week, it deserves the full email, well most of it.

Adam Kitchen’s Post: The Klaviyo Agency Business Model is Dead

I’ve know Adam since we started Formtoro so more than a few years now and I’ve been beating the drum that Email Agencies are in for massive commoditization.

I’ve written about it before too.

I’ve pissed off a lot of agencies for saying that most of the services that they provide are pretty much completely commoditized.

Here’s the post in full, because I think everyone should read it:

The Klaviyo agency business model is dead - face it without crying.

In the next 2 years, you're going to see a massive exodus of email agencies in the DTC space that serve clients in the $1-10million revenue range and just a sprinkling of skilled freelancers serving this market segment.

Here's what's happening and what you can do to prepare.

BACKGROUND

I own a Klaviyo Elite Agency. We've worked with over 130 brands and audited over 400. I've been in eCommerce for 17 years both on the brand & agency side and have enough context on how brands think & agencies grow at this point to see what I believe is an irreversible trend.

HOW WE GOT TO THIS POINT

Klaviyo has been the runaway market leader in the SMB space for Shopify businesses running email. Their brilliance has been in delivering powerful features with a small learning curve, eradicating the complexity associated with ESPs in the past which made it difficult for DTC brands to leverage email.

But Klaviyo's success is also its bottleneck: it's now a public company and can't continue to grow catering to this market segment. It has to go enterprise, and many smaller brands are begrudgingly paying their bills waiting for a viable competitor.

CURRENT LANDSCAPE

The days of cheap META ads and Covid growth are over. DTC as a business model is losing its allure. The margins are shrinking, CAC feels like a battle that can't be won and the commoditization of products is destroying the value prop of 80% of brands.

This leaves Klaviyo's main market segment fighting an uphill battle with razor-thin margins for paying agencies.

These companies don't have serious retention problems: they have brand equity issues that can't be solved by sending more emails.

Combine this with the fact that AI-enabled tech is aggressively cutting out the middlemen to deliver more value to merchants and you have the perfect storm for agency death.

Lastly, the agency ecosystem is saturated. Klaviyo has over 9k partners and around 100k paying customers. The maths doesn't support scale.

HOW CAN AGENCIES SURVIVE?

I see 2 paths to survival (and growth) for agencies built exclusively around Klaviyo.

1: Increase your skills & hedge your bets on Klaviyo penetrating the enterprise market segment

Cookie-cutter strategy & design templates are rapidly becoming worthless. These will be out-of-the-box features very soon in most ESPs that brands in the $1-10m range desperately need to reduce agency fees.

To combat this you'll have to increase your skillset & learn to work with bigger brands. The volume will be less, but the retainer model significantly higher.

2: Leverage a Migration Model

It's no secret that there's a war heating up for that compressed $1-10m market segment.

Yotpo, SendLane & others are circling these brands aggressively and trying to achieve feature parity to migrate them.

The financial rewards for striking a partnership with the right SaaS could be EXTREMELY lucrative

TAKEAWAY

*DTC Brands in the $1-10m range can't afford email agency fees
*There are not enough merchants doing well to support the Klaviyo agency model at scale
*SMB market sentiment resents paying increased ESP costs
*There will be a winning SaaS company that captures the majority of these brands and the right agency can benefit from this
*Templatised agencies will be ate for lunch by Klaviyo
*Agencies looking to continue building around Klaviyo should lean into its CDP offering & target its enterprise customers
*How you differentiate your value proposition as an agency has never been more important to stand out
*Technology is the next frontier to build that value prop around

Am I on the money or completely off with my predictions?!?!

I’ve been in ecommerce for a long time. Sorry Adam, I wanted to wait to this email to respond to your post in more detail than I could have fit in a normal comment response.

I want to tackle this in detail, because it deserves it and I agree with a lot of what Adam is saying, but I’ll posit another opinion at the end that might leave a few of you scratching your heads.

The How we Got to this point:

Klaviyo Exec: “We need people to use our platform”

Another Exec: “Let’s start a partner program and cut in agencies on the action”

Klaviyo Exec: “Sounds good, let’s create a training program, then they can call themselves certified, then their status will completely be dependent on how much business they bring us, let’s gamify our way to growth”

Another Exec:" “That’s genius, let’s do this!”

2019: Number of Klaviyo certified agencies: 200

2024: Number of Klaviyo certified agencies: we’ll use Adams number mine is closer to 2500ish

So 10x growth of “experts” in 5 years or so.

He’s right, they have to go enterprise, the problem, they don’t have an enterprise product. Some of the most basic features required for enterprise are missing.

Merge accounts between email and phone numbers? Yes, they are publicly traded and still haven’t fixed this at scale via order data.

That’s crazy shit. Do you know how many clients are getting double billed on this stuff?

Their advice, have two different lists rather than segment the lists, woof.

So how do you increase prices for everyone, push out sms to increase revenue generation, bonus agencies to do that in the UK which is predominantly WhatsApp and still succeed, as your stock price drops 27% from it’s high?

I’m not sure.

I like them as a company, have been using them since 2015, still use them with the brand we run until I can shift things to Shopify Email and Shopify Flows.

(more on this later in this email)

CURRENT LANDSCAPE

The landscape is different, it’s been changing for a while, there’s probably LinkedIn and Slack messages between us dating years back where I predicted a bloodbath hitting DTC companies, this stuff was predictable, I just wish I took all my stock gains and shorted every DTC company that went public, I wouldn’t be writing this email, I would have retired.

Adam is right though, margins are smaller, competition is more, brand doesn’t matter as much as people think, more emails won’t solve this.

I’ve already commented on the eco-system being saturated.

There’s going to be an epic collapse.

But that collapse is also sadly going to kill a lot of people that have made their livings providing services to small companies that just can’t justify the costs anymore.

The comment about AI generated stuff though is something I’ve talked about previously, we’re actively playing in this space.

So when someone calls me anti-agency, I’m not, I’m pro brand and very pro technology.

HOW CAN AGENCIES SURVIVE?

“*Technology is the next frontier to build that value prop around”

This I have been saying for years and I completely agree with.

With Klaviyo - like he said enterprise until they take it internally.

With AI on the rise I see everyone going internal or agencies learning and leveraging some serious technology.

I’ve talked about a few before, but here’s a good list, in no particular order:

• https://stripo.email/

• https://designmodo.com/

• https://useblocks.io/

• https://beefree.io/

• https://unlayer.com/

All of these are going to add ai or have it in some places.

These are using AI

• https://www.meetsidekick.io/

• https://getripple.ai/

• tare.ai pivoted, but I liked what they were doing, it was just limited

• Unreleased product from Formtoro - it was inevitable for us to move beyond just forms, we’re working on this right now, then after that will be ads.

Yup, because what’s better than combining data, segmentation, and ai generated emails backed by data driven strategies around subscription to purchase rates and repeat purchase rates?

But guess what you can only do if you have contextual data?

The question though is do you even need an ESP?

But what really interests me is something that no one is paying attention to.

Shopify Email, which is built on Shopify Flow.

And boy do they have themselves some triggers:

This is the first level down, they just released 3rd party API access to Flows too, which means you can trigger on app events…

For example in the future, I see us at Formtoro pushing out data directly into Shopify, building segments in Shopify, then building out complete automations based on behaviors directly in Shopify and Shopify Flow.

This is manual right now, but you know that Shopify is going to move AI pretty quickly.

And guess what they allow you to do? Import HTML email templates.

The pricing is pretty interesting too:

• You can send additional emails beyond the 10,000 free emails at a cost of $1 USD per 1,000 additional emails up to 300,000 emails. After you reach 300,000 emails, your pricing is $0.65 USD per 1,000 additional emails. After you reach 750,000 emails, your pricing is $0.55 USD per 1,000 additional emails. You aren’t billed for the additional emails until the cost reaches $0.005 USD.

• Shopify Email is available on Basic, Shopify, Advanced Shopify, and Shopify Plus plans, and you're charged only for the emails that you send.

Yotpo is going pay as you go too, there’s a reason for this, it makes more sense for businesses that are cost conscious.

Now why do I think this is a dark horse and might just replace Email Service Providers generally long term?

The granularity of triggers based on all apps that integration with Shopify Flow natively + Shopify Pixel with all the data + Shopify AI hopefully going to be available to help people build and automate flows.

They just opened up Segments and Customer Fields in Shopify too as well as redid their reporting, if Shopify is really looking to make business easy for small business, watch this space.

Email marketers that learn to implement these sorts of flows, will crush it. Because the learning curve is steep.

Compare this to Klaviyo’s Triggers and Metrics:

No joke, if I was an Agency I would learn to be an automation wizard, this is what I did with Typeform → Zapier → Gorgias and it’s been helpful.

I used this at LIFX and automated 80% of customer support tickets without AI.

What if you didn’t need an ESP and instead you just answered questions related to your business goals and the program and ai agents just executed in order to hit your cumulative goals?

This is where we’re headed.

So let’s cap this off, Adam suggests going up market to enterprise and being platform agnostic, both good ideas.

But I don’t see the modern ESP surviving, it’s going to be a CDP that plugs in directly into Shopify with Shopify Flow, 3rd Party App APIs and and AI layer to personalize journeys at scale.

Mind you there’s only two real journeys to personalize, the first purchase and the second purchase, beyond that stick to the basics and you’ll do fine.

The rest you’re better off just sending to people and purging the list of those that are inactive.

So what does the future of agencies look like?

Partner up with SaaS people that are actively building things that are moving towards a future where everything is automated.

These companies aren’t big right now, they are going to come out of nowhere.

They are going to be operators of businesses and build the technology to solve for their own problems.

I’ve been on the brand side from VC backing and lots of budget and retail all over the world to starting from nothing and building to 7 figures with just two people profitably.

I can tell you from dealing with tons of small companies out there, the spot for marketers in the near future is going to be owning all marketing channels by leveraging AI for brands doing less than $10 million a year and getting equity.

This is going to spit the difference of those that survive and those that thrive.

The aggregator model hasn’t worked out super well for ecommerce, but I think that the majority of that is because there really aren’t real operators in the sector.

I’d have to kick out most founders to take over something that’s sub-optimal.

It’s easier for me to just buy their products, source them myself, then brand my way through building a brand.

Why take a cut if you can just out market and out perform.

There is going to be a company that automates marketing for ecommerce, email and data collection, automated email journeys tied to data combinations with offers, and automated ad creation with budget decisions made on data sets that go beyond just ROAS.

You can’t do these things without data and building systems to collect and analyze data from an operators perspective leveraging a battle tested playbook over the last 5 years with a constantly evolving strategy is tough to make.

So in the words of my email dude the other day that said “people don’t want to work with me because I’m anti-agency” instead think of it this way, what happens where there is only software and no more agencies?

Now that’s the real question you have to ask yourself as the ecommerce market changes, at what point to people like me who operate businesses and play in the space with access to a lot of brand data start to realize where the patterns are.

I have some brands that have never touched their forms in over a few years.

There’s still a ton of opportunity out there right now in this space to partner, I might be the only hope for consistent growth.

I’ve rather cavalierly said this before, “You’re either with me or against me, but rest assured if you’re against me I will try to put you out of business.”

Because I’m not the only one that’s toeing the line of building software to replace the service industry, it’s my strategy at the end of the day anyway.

The Takeaway

Have a great week!

-Jon

Catch up on past posts: https://ecomwithjon.beehiiv.com/

You can learn from me: jonivanco.com