Facebook kustomer

Why Facebook Really Acquired Kustomer & What the Future Holds

by | Jan 12, 2021

More than any acquisition of 2020, Facebook’s Kustomer purchase left martech experts scratching their heads. Sure, Facebook has made ostensibly odd acquisitions before (e.g., Oculus), but all could be satisfyingly rationalized. In comparison, Kustomer felt like a real outlier. How does a fledgling customer service CRM platform support Facebook’s strategic business goals?

 


Kustomer Acquisition Opportunities

In reality, the acquisition is incredibly savvy — provided Facebook plays its cards right. Here’s how to think about it:

  • Facebook is in the shopping business — and business is good: Facebook and Instagram shops have been a tremendous boon for their stock price, and providing the appropriate backend is a critical part of getting that story right. Facebook almost certainly aims to deliver a true end-to-end buying experience superior to what Shopify and others can offer. They lack the same depth of tooling, however — particularly where customer management is concerned. 
  • In case you hadn’t heard, Facebook is in the ad business, too: Almost everything that Facebook does, ultimately, is in the service of ad revenue. Platform investments, acquisitions, data plays — all of it translates into ad dollars. Facebook is incredibly similar to Google in this regard. 
  • Facebook’s ad dominance comes from superior data: Facebook is an advertising behemoth because it commands disproportionate impressions and pairs those impressions with a nearly unrivaled identity graph; the integrated value of Instagram, Whatsapp, Facebook, Facebook Connect, and the Facebook Pixel is simply tremendous. Facebook’s ability to identify customers anywhere and serve premium ad units in high-engagement spaces is what ungirds its strategic position. Their identity graph allows them to target consumers more precisely in both retargeting and acquisition use cases, and this has allowed them to show higher ROI relative to competitive options.  
  • Facebook’s data landscape is both evolving and creating risk: Much has been made of the decline and fall of the cookie, and its impact on Facebook’s business is poised to be material. Today, Facebook’s pixel is a foundational piece of their identity graph: it is the primary connection between Facebook’s owned spaces and consumer activity on advertiser properties. Through it, Facebook gets browsing and conversion data that are critical to both fueling and justifying advertiser spend. With the Facebook Pixel now at risk, Facebook needs other pathways to get 1p advertiser data, and they need to fully own them. In many ways, Facebook is already preparing for this with their “Offline Conversions” product. 
  • Data regulations represent incremental risk: GDPR and CCPA are imperfect, but they collectively represent an idea that isn’t going away; customer data will be regulated, and companies will have to justify their aggregation and usage. Facebook is thinking very seriously about PII (personally identifiable information) — Where will using PII expose them to legal risk in the short and long term? What do these risks imply regarding their strategic position? And what can be done about it? 

So, Facebook’s business turns on having superior data, and cookie annihilation + new regulations represent a risk to that position. In response, Facebook is looking for a way to get first-party data reliably, in real time, and in a way that doesn’t expose them to legal challenges. 


Kustomer for Customers

Facebook also wants to be in the business of providing end-to-end shopping experiences and needs the tech to back that up. Kustomer, properly deployed, is a great potential pathway for all of these goals:

  • Kustomer collects customer service data, which is very defensible: Regulations like GDPR force businesses to justify their rationale for keeping and using customer data. In practice, this means that as more legitimate customer value is created through the use of a customer’s data, the less restricted the use of that data will be. For example, the EU’s regulators don’t view showing more relevant ads to customers as a particularly valuable use of customer data. Accordingly, there’s long-term risk in justifying customer data collection based on improving ad relevance. In comparison, making sure an order is delivered correctly is seen by regulators as mission-critical; this means that if Facebook’s 1p data landscape is built on Kustomer (vs. some other pathway), they’ve essentially de-risked losing access to a critical element of their identity graph. Smart. 
  • Kustomer’s data collection isn’t predicated on pixels; it’s more holistic: Kustomer has differentiated by having a friendlier approach to data integration, one that is both real-time and flexible. With the ability to integrate elements of purchase data, browsing data, and support interactions, Facebook can use Kustomer as a way to retain 1p data visibility in a cookieless world. Additionally, with Kustomer deployed at a company, the wolf is truly in the henhouse: Facebook finally gets fully inside of their clients’ walled garden, no longer simply relying on cookies for understanding the dynamics of an advertiser’s business. They see it all. 
  • Kustomer has shown real success with exactly like the type of customers FB is courting for Shops: With tremendous penetration among born-digital D2C companies, Facebook likely believes Kustomer will fit in elegantly into their existing commerce stack. Kustomer brings a set of customers that have scaled up through all of the stages of D2C growth and can potentially offer these solutions to Facebook’s massive mid-market. Currently, the support model for Facebook shops is notably lacking (and that may be an understatement). This could be a major part of the answer that also paves the way for an enterprise push.


Kustomer Service

But if Facebook simply wanted to get into the world of 1p data management, why buy a CX-focused CRM solution instead of a more traditional one? 

  • Facebook and Instagram Shops have a service problem: As mentioned, both Facebook and Instagram Shops decidedly lack when it comes to the service experience. What’s true for the enterprise is true for the mid-market/SMB segments: service wins. If indeed, Facebook is looking to solve this problem with this acquisition, only a CX-focused platform would do. 
  • Enterprises want to turn their service interactions into revenue streams: There’s a proven and strong correlation between service excellence, LTV, and winning market share. Accordingly, businesses are investing heavily in solutions that will help them realize this opportunity. Kustomer — along with Zendesk and others — have been growing on the back of this trend. Additionally, many businesses, both traditional and born-digital, are also realizing that they can’t effectively differentiate on product or price and thus have to embrace experience holistically as a differentiator.
  • Facebook’s properties are increasingly the locus for service interactions: The shape of customer support is changing quickly. Social networks have become a dominant space for brand-customer interaction. Both older and rising generations of customers have become comfortable using Whatsapp, Facebook Messenger, and even Instagram/Facebook for support and conversion activity. Facebook owns the conversation space but provides an API for vendors to connect to these platforms. Why not build (or, in this case, buy) down the value chain, particularly where those next steps provide a critical, defensible pathway into oodles of 1p data? 
  • CX is becoming the heart of CRM for enterprise B2C companies: Because of this new revenue mandate, we have seen the rise of the Chief Customer Officer, reflecting the growing importance of “owning the customer relationship, end to end.” CX CRM solutions like Kustomer are designed to function as the operating nexus for managing the customer relationship in this new world. Salesforce has long hoped that their core SFDC product would serve this function, but it never quite fit; recent investments in Service Cloud and C360 Audiences are an acknowledgment of this reality. They’ve also now truly integrated a proper CX tool into their CRM to address this. Zendesk’s product is strong but has limitations, particularly where data is concerned. Kustomer can and has disrupted both incumbents, and with Facebook’s backing, could be dominant. 
  • Marketing and service interactions bundled together = new ad products and new ad dollars: Once Facebook moves down the value chain into your 1p data, all sorts of interesting possibilities emerge. Facebook can develop unique ad products to help mitigate negative customer service interactions in real time. True 1:1 offers that are natively integrated with your CX experiences in Whatsapp/Facebook Messenger can drive entirely unique programs that improve LTV. Products built around bidding on your competitors’ customers abound, all natively delivered. Imagine what would be possible in a world where there’s a Facebook phone. No one else can offer anything like this; Facebook just needs to execute. 

Ultimately, the TL;DR on this one is pretty straightforward: Facebook wants your 1p data, even in a cookieless world, and they don’t want to get sued for using it. More people are using Facebook’s platforms for support interactions, companies are investing more in support/CX than ever, and the tech market hasn’t been won. Facebook sees an opportunity to build better ad products through deeper integration, generate more ad revenue, fix customer pain, and solve their 1p data problems in parallel. They might even win an evolving SaaS market for their trouble. Oh, and they’re investing in a better future for Facebook and Instagram Shops, which could make the acquisition on its own. What’s not to love? 


Will it work for Facebook? And how?

So if the case is straightforward, what has to happen for it to work? A few big things:

  • Facebook needs to have clear, differentiated use cases: Facebook has massive enterprise penetration. To drive Kustomer adoption, they will need to pick specific use cases that create significant, differentiated enterprise value. Marketers and technologists are more than happy to invest time and money in new initiatives, but the ROI has to be super clear. Facebook will get the benefit of the doubt in ways that others can’t, but the case still has to be there. As discussed above, there’s certainly no shortage of interesting ideas for Facebook to pursue here (e.g., native ad products); whatever they choose, strong investments in product marketing and sales enablement will be critical to driving success. 
  • They need to ensure data integration into Kustomer is super easy: While Kustomer offers a lot in terms of data flexibility, integration isn’t always easy. Given that so much of the potential value for Facebook lies in using Kustomer to access advertisers’ 1p data, they need to make sure that they have a strong, simple pathway. I wouldn’t be surprised if Facebook pursues a supporting acquisition to make this easier, potentially in the CDP space. 
  • Kustomer needs to become truly enterprise-ready: Kustomer’s enterprise penetration is very low. It appears as though the vast majority of their customer base is born-digital DTC. These DTC brands’ digital strategies have served as the new template for entrenched enterprise companies. They’re looking to hire CMOs and heads of performance marketing/CX out of them to drive digital transformation. In that sense, Facebook’s acquisition of Kustomer makes sense; just as Facebook ushered in a “new way” of buying ads online, their bet here is that they can use Messenger + Whatsapp + Kustomer + their ad products to usher in a new era of real-time, omnichannel CX management. But Kustomer almost certainly needs to make enterprise-readiness investments for that to happen, meaning things like permissioning, instancing, security, and more. 
  • They might need to make Kustomer free for the enterprise (or close to it): Remember, to the enterprise, Facebook is an advertising business; where Salesforce makes money off SaaS licenses, Facebook should choose to simply commoditize their competitors’ profit centers and get paid via ads. Google Analytics is the gold standard for this sort of thing: Google built an analytics product that they basically gave away for free (and essentially continue to, even at the enterprise level). Why? Because it helped them show the value of AdWords and generate more ad revenue. By doing so, they were able to functionally set the standard approach for measuring ad performance: last-click attribution. Any idea what attribution model favors search above all others? Facebook can do something similar here.   
  • For enterprise advertisers, it ultimately just needs to show incrementality: If Facebook’s work here results in even a single percentage point improvement in ad conversion rates, the long-term impact will be extraordinary. Reductions in CAC will drive increases in ad spend, and the price tag for Kustomer will seem inconsequential. 
  • They must tell a great story about providing a full end-to-end buying experience: For their commerce customers, this is about delivering a better customer experience that should keep you far, far away from Shopify or other competitive platforms. Facebook has an opportunity to help the next generation of D2C — and potentially enterprise — companies build entirely on their commerce stack from the ground up. This has the potential to meaningfully diversify their revenue in the long term.  

If Facebook can make the barriers to entry low (i.e., minimal cost, good enterprise readiness, fast integration) and deliver a compelling product vision, the ad dollars will most certainly follow.  

The chances are that Facebook will work with those born-digital DTC companies early to show initial success before rolling out offerings to their more ambitious enterprise partners. Assuming strong performance, enterprise companies already on competitive solutions will find ways to rationalize overlap in the short term, with an eye towards ripping and replacing in the long term. Facebook simply needs to get a foot in the door. 


What does this mean for other players in the space?

Given the enterprise dynamics discussed above, folks at companies like Salesforce and Zendesk should be paying attention. From their perspective, Facebook can use ad products built on the promise of “true omnichannel engagement” as a Trojan horse to win a quickly growing SaaS market. Both Salesforce and Zendesk have very clearly built their strategy around CX management, and both need to be thinking through the implications of this deal.

First, Salesforce is still ascending in the enterprise when it comes to marketing/CX CRM, and customer support continues to be a major investment area for them. They’ve been clear publicly that their CDP (C360) is targeted at connecting service and marketing interactions, though the maturity of that product continues to be somewhat unknowable. 

Nevertheless, the loftiness of their vision, their existing infrastructure and entrenchment relative to the operational elements of CX management, and the sheer variety of technologies under their umbrella (e.g., Krux, Evergage, etc.) make it unlikely that Salesforce can be meaningfully displaced in the short term. Instead, expect an uneasy alliance of sorts until we find out whether or not Facebook can offer a holistic alternative. 

In Zendesk’s case, its entrenchment in the upper midmarket and certain verticals of the enterprise has been relatively unchallenged, but both Kustomer and Service Cloud have pathways to threaten this. In short: they could be in for a tough time. It’s easy to imagine Zendesk looking at Kustomer prior to its 2019 acquisition of Smooch and deciding it was too rich given their relative safety in the market. Kustomer was gaining traction, but ultimately wasn’t enough of a threat to justify a major expenditure; better to snap up Smooch to accelerate the development of similar functionality (e.g., Whatsapp and Messenger integration) than overreact, after all. 

Now, however, Facebook — who owns both Messenger and Whatsapp — owns their direct competitor, making the future integration landscape much less certain. To maintain its edge, Zendesk needs to drive superior product innovation and remain active in M&A while hoping Facebook and Salesforce get distracted by other priorities.

Finally, Shopify deserves some discussion here. Facebook’s story in online shopping is a nascent one but potentially massively disruptive to Shopify. The native, end-to-end integration that could be realized by Facebook (from the first impression, through click, into purchase and post-purchase) is unprecedented. But it needs to get traction. If it does, Shopify’s response will be fascinating. 


Conclusion

Given the primacy of first-party access data in Facebook’s presumed designs, it will be particularly interesting to see how Kustomer’s product evolves under their ownership, and of course, how Salesforce and Zendesk respond. Data management and access in CRM remains a massive challenge — seen often from our purview — and which can look very different vertical by vertical and even company by company. With Salesforce’s heavy bets here on C360, one imagines a natural collision point at integration. 

Other, smaller, or much older players in the space will have their hands full. It looks like a three-horse race at this point, with a lot of open questions for each company. Ultimately, Facebook’s intentions will go a long way to determine how this shakes out; if they have larger designs on martech/CRM, it will change the outcome materially. 

Beyond this, the confusion around the acquisition exposes the artificial divide between “martech” and “adtech.” This conceptual divide, predicated as it is more on technological limitations than anything strategic or utilitarian, will continue to fade into the background as major players push innovative and disruptive approaches. 

At the end of the day, CMOs and CCOs don’t care what you call it: they want to manage the customer experience in a way that’s differentiated, and they want to maximize revenue through traditional service interactions. B2C businesses realizing this are making more money and winning share of wallet; B2B businesses facilitating this are winning markets. If a company (in this case, Facebook) can offer something fundamentally new and powerful that stretches across both adtech and martech, it will be adopted. The question then will not be When or If but How.

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