Off the software track with Klaviyo. We have Ed Hallen, who is the Co-Founder and Chief Strategy Officer. Ed, thank you for joining us. I know obviously it is a busy week for you with K:BOS coming up in Boston, your big user conference. Thanks for coming down. Maybe just for folks a little less familiar with you and the Klaviyo story, just give us an overview of your background and where you focus on in your role at Klaviyo.
Yeah, totally. We started Klaviyo in 2012. Before Klaviyo, we were working for a startup building large-scale business intelligence software. So, think of folks like Bank of America, Walmart, Starbucks. One of the key problems that my Co-Founder, Andrew, and I were focused on there was how do we unify all the data sets that exist across these large orgs?
If you think about a large coffee chain, the system that knew what the sales were on a given day was totally separate than the system that knew what inventory in the store was certainly different than the system that knew who actually was working in the store that day, and it was different than the real estate system that we could use to look up whether or not it was a college store or whether or not it was raining near that store.
That was the problem we had been focused on, and we had this belief that, hey, businesses in the future will need a single, consistent data store that unifies all this different data and can be accessible at scale and with very low latency. We went through a few different ideas, but built that data layer and then went saying, okay, we knew we wanted to bootstrap the business.
Where can we use this system to drive revenue? Eventually focused on the SMB, because we could have very tight feedback cycles, and focused on revenue generation. We early on said, "Let's take this data layer and attach marketing to it." At the time, specifically email.
What we did is of our first 10 customers, a variety of SMBs, a parking lot and software companies and e-commerce, 3 of the 10 were e-commerce companies. We said, "Okay, if we are going to bootstrap, we have to lean into these." Leaned in heavily and said, "Okay, we are going to be the revenue generation platform, the marketing automation platform behind these," but the difference is that we started with this data layer, that is really where our expertise is, and bolted this data layer atop.
Fast-forward 12 years, it is really the same. At the time, we were always agnostic to what the channel was. We picked email because that was primarily what our initial customer was using to drive revenue. Over time, it is we think about SMS the same way, WhatsApp the same way.
Honestly, APIs, the website, really anything that can be used off this common data layer to power the business forward, but specifically the revenue. In terms of myself and my role, have done kind of everything over the course of it, from initially co-CEO to Chief Product Officer to Chief Marketing Officer, and then now I spend most of my time kind of across the business, but mostly on product and AI and things like that as the Chief Strategy Officer.
No, that's great. I always enjoyed having practitioners like yourself speak, and you're probably iterating and testing out these new AI products as it relates to improving your product development and everything. I think it'd be great just to give the audience a kind of first-hand account of how has AI impacted your process.
You founded the company, so when you were building software at the early days, what does that difference look like now? How would you sort of quantify what AI has been able to do in terms of improved lines of code or shipping products faster?
Yeah, it's wild. I think we've always thought of software as you build software to drive outcomes. When we thought about in the early days, it's like, okay, we could spend some amount of time building software ourselves and you always want to have something where you can measure the impact of what you're doing.
For us, that was always the revenue of our customers. We still use this as a metric we call KAV, so Klaviyo Attributed Value. Over time, obviously, the company got a lot bigger, many more engineers, and we used to much more think, "Okay, hey, there's efficiencies we can drive with how we let people work, so we can build common engineering infrastructure. We can train people, mentor and guide them.
We can control how senior people we hire are." I think what we've seen over the last few years is dramatic improvements to just how fast we can ship things, and so it's really speed. We've seen 2X changes in how fast we're shipping things off common things that match consistently. We really think there's just radical more.
This will just keep improving over time. It's not just in engineering, it's related, it's product design, but it's also across the org. We've seen internal tools we've built and just complete changes in processes that we can almost entirely eliminate internally using different AI tools and every few months, the pace just quickens.
Got it. An example of those processes is a kind of review documentation type stuff or?
Yeah, review and documentation, but also things like, hey, how do we process expense reports internally? How do we process certain types of customer requests? Where can we automate certain types of support queries that come in? But then all the way down to just literally how do we design product and which pieces are humans doing?
There's things where we can now spend more human time figuring out the customer needs and exactly what we're trying to build and less human time on the actual building of or writing of documents or doing things like that, where we can actually shortcut a lot of steps that are now done primarily by AI.
Got it. Shifting to kind of the products in more detail, right? There's been a lot of interesting releases with Customer Agent. You have K:Social, Composer, et cetera, and you recently acquired Agency too. So give us a sense for where is the product roadmap heading, what makes sense to build versus potentially acquire inorganically?
Yeah, totally. We started, we built this data layer, and then we layered the marketing on top. So we always thought, hey, there's a natural expansion that will be channels. So, what are the channels people are using? We were heavy on email. We've since been much heavier on the full suite of kind of outbound, think about it as like SMS and WhatsApp and things like that.
More and more on the just what are all the surfaces people interact in. So, not just those, the messaging, but also the website. We've always thought of this as like, hey, we started with the SMB, and for a long time we've been stretching that up to much larger and larger enterprises. So there's a piece of the roadmap, which is just that continuance of the vision.
A second is a couple of years ago started to say, "Hey, really you want the common data and contextual layer, not just beneath marketing, but also against kind of any customer interaction." This led to the help desk and Customer Agent and kind of any products that help answer customer queries as they come in or have those dialogues, active dialogues with customers.
That's kind of the second bucket. I think that the third though is, we've always thought of Klaviyo as like the reason people use Klaviyo is to, again, to kind of drive a customer outcome. What's possible now with AI tools is some of that usage is going to be a human, but a lot of that usage are also going to be agents. Some of that happens internally, some of that happens externally.
These are things like, "Hey, look at my strategy and figure out what are the gaps where I could be generating more revenue. Look at my strategy and figure out if I've done anything wrong, where I've made a mistake and can set things up differently. Hey, my designers built this copy. Can you tweak the content to make it more effective?
Can you design new content?" Just really the full suite of how do we have an agent sit side by side with a human and make the results coming out of Klaviyo more effective. The key iteration of this is our Composer product, which we released a couple of months ago. We've already had 138,000 customers use it, so kind of tremendous adoption.
We'll continue really to be focused on this, which is just given the common data layer, given the tooling we have, then to make use of that, how do we leverage AI basically to let our customers grow faster or accomplish more of their internal outcomes? That'll be our, I think that's a durable focus for the next many years.
Yeah. You touched on Customer Agent, and I think going back to the last earnings call, you talked about 40% sequential growth and just adoption and huge increases in weekly resolution rates. Where are we at in that adoption curve? Because, look, I think there's a lot of excitement around agents and certainly with a huge customer base in the hundreds of thousands of customers of yourselves. When should we think about that being a meaningful driver-
Yeah
the overall growth of the business?
Yeah. Currently, as I think you know, the numbers we've reported, none of the Composer or Customer Agent numbers are baked in. We're seeing tremendous progress on Customer Agent. The 40% quarter-over-quarter remains our fastest-growing product in the company's history. I think it's Composer we're kind of on week to week, like, here's the day-by-day iterations.
You'll keep hearing a lot from us on the Customer Agent growth because it really is something. It's like a perfect fit for the data layer, and the growth has been tremendous. I think we're also tremendously excited. The Agency acquisition, we brought in Elias, who we've known for a very long time as the Chief Product Officer.
He's very focused very specifically on agents. My co-founder, Andrew, remains focused across product, but also deep in agents, but also with Elias, kind of a very known, trusted partner. We'll just keep leaning in to accelerate that product over time.
With the Agency acquisition, how should we think about the path that Agent was on pre-acquisition now with Agency? Is it going to be like a new unified product in a few months down the road, or are they going to be separate strategies?
Yeah, I really think of it as a speed thing. It is getting great people to come in and just continue to accelerate the velocity.
Right.
And kind of at all levels. It is the engineering depth on the problem coupled with the momentum we already had, a strong leader focused on the same area. It is really same vision, same data contextual layer. How do we do more faster?
That is generally how we think about acquisitions. We certainly think about where we can accelerate the core vision. Then over time, things like on K:Social, we bought a very small social company to just add functionality that we could add much more quickly if we kind of did it inorganically versus organically.
Right. Just to kind of put it in plain terms, when your customers are using Customer Agent, is it primarily just used for a returns use case for e-commerce? What are kind of the most effective? Where are you seeing those biggest jumps in resolution?
Yeah. There's a set which are kind of highly predictable, exactly what you expect. It's like, "Hey, I've got a return. I put in the wrong shipping address." The product arrived, and it was broken. Just kind of this set of things that, hey, are very predictable.
They're very true across e-commerce. Those are very common, but the flip side is I think more and more we see that people get really excited about where they can actually drive revenue through these conversations.
Once you have a combination of kind of AI and humans, it's much easier to think of it as just a customer interaction, and it's not just, hey, I have a problem. I want to resolve this thing and make it go away as quickly as possible. But hey, actually, I have a relationship with this brand. We know what you bought.
We know what you're probably going to buy in the future. We know that you just had a shipment arrive. We can actually make that a productive, mutually beneficial conversation of, "Hey, actually, you probably want this suit jacket versus this one."
"As you will return this one, but we think you're going to be really excited by these products over here." I think those are the ones that are maybe a little less very down the pike of where people expect, but it's the things that actually people are much more excited about and where we've seen a growth in resolution over time.
Right. Yeah. Certainly an upsell opportunity if you have all that information. On the broader AI journey, talk to us a little bit, just the Shopify partnership, obviously a longstanding partnership. Where do they sort of fit in with all this? Who kind of owns the customer from that perspective?
Yeah, it's a partnership we're super excited about, have been for a long time. The origin of that partnership was, rewind 12 years ago, we knew that if we were building the data layer, you have to bring in the key data sources. We integrated quickly with the Shopify, Magento at the time, Salesforce, all the different platforms that had the bulk of the data.
The belief was always that, "Hey, there's a transaction that they're managing, but then we're going to pull in not just their data, we're going to have the full, complete view of the customer." If we think about the end customer, sure, Shopify is managing a key piece of that. For our customers and their mutual customers, it's really a very symbiotic relationship of yes, they're running the platform, the transaction layer, the e-commerce online experience.
We are the data source of record running with the complete customer view and log, and we will plug into their experience to make that even more personal and driving. That basically remains true, so it is still a very strong partnership. We are very excited by things where we can make that very mutual.
We recently plugged in a Sidekick app, so into their AI where we can continue to personalize their experience using all the data that those merchants have in Klaviyo. That is really how we think about Shopify, but more and more how we think about any business we work with, e-commerce or not, which is you are going to have these fundamental platforms driving part of the business.
That data is very important to us, that relationship is very important to us, but at the same time, if you think about, hey, for a given end customer, I want to understand the returns data, I want to understand the inventory situation of what they look at, I want to understand the website data, I want to understand any of the long-tail system, any long-term system data, where that customer came from, and that is where we think of Klaviyo really as the data source of record.
Got it. I did want to ask you about the K:BOS conference coming up. Just what should investors be expecting in terms of product announcements? I know you are probably saving a lot for the actual conference, but just give us a sense of what we should expect out of that event later this week.
Yeah, I think the things we are excited about remain very true, which is we are the data source of record, we have ways to drive revenue atop that, and then in the age of AI, we can do more and more to move even faster, and that is marketing, that is service. I think you will just continue to see a lot of momentum there.
I think the things we get really excited about are it is a great time to talk to lots of customers. More and more of those customers truly do range from the biggest brands in the world to the smallest, like we are a year or two into our journey. Between saying that, it is like we see actually now a very strong community of those customers talking, and then certainly a way to launch more products.
But I think those very much fit in this direction of where we can really have that deep customer understanding and use that to drive results for brands. I think that is marketing, that is service, that is, hey, how do we build AI to supercharge both those?
Got it. This idea of obviously Klaviyo being this powerful data layer, you talked about the founding of the company being in the BI space as opposed to email or whatever, right? One of the things we've seen recently is traditional SaaS companies are partnering with the big LLMs to kind of activate that data layer and maybe charge a consumption or premium rate on that.
How do you sort of think about those partnerships with the Anthropic OpenAIs of the world as, maybe we hear something later this week, but just philosophically, how do you think about that compared to some of the big announcements we've heard?
Yeah, philosophically, we think of it as, look, people use software to drive outcomes. When they do that, more and more, it's people using software and it's AI using software. That happens kind of independent of your approach. In fact, the incentive for us or what we believe is most important for our customers is make it possible to use Klaviyo any way you want to do that.
That might mean AI using Klaviyo directly, it might mean you're using these other tools and leveraging them in Klaviyo, it might mean you're using our Composer tool or other tools where we're actually under the hood, highly leveraging these models. But the key thing is, "Hey, what's the outcome you're trying to drive, and how do we let you do that as fast as possible?" That is what makes Klaviyo durable.
I think as we think about partnerships, it's all about finding ways to accelerate that customer value and ways that are mutually beneficial on both sides. I think we're tremendously excited by what's possible, and it's really just the shape and flavor of how people are using these tools in conjunction that changes.
There's not a world where people are using tools in silos. We also believe there's not a world where people are not leveraging any deep data context layer, which is kind of fundamental to how you treat people personally and how you actually drive the outcomes you want and that are good for those customers on the other side.
Got it. You touched on some of the larger customers earlier, which I think that's been a really impressive growth area for the company, the growth in 50,000 type customers. Can you talk about just the progress there? I guess what sort of verticals are you seeing success with? What sort of products, from a multi-product perspective, are the larger customers taking up most?
Yeah. We've continued to see great progress on the multi-product front, and it's people start with email or email and SMS, people leverage a lot of our marketing analytics and analytics tools atop that. That's a very common progression. Then we're in the early stages of starting to see people unifying their journey, so kind of consolidating across the service realms as well.
It really is, in some ways, it's not inconsistent with what we see with smaller customers, but it is a very much for large customers. They think of this as a pure consolidation and what oftentimes for many tools, how can we do the same things better, but with actually even fewer tools? We continue to see that, but yeah, the most common are email, SMS, often including WhatsApp and marketing analytics and kind of more data tooling atop those.
I see. The sort of consolidation motion that you talked about, where do you find the larger customers are often consolidating from? Like who's getting displaced in that?
Yeah, numerically, it's what you'd expect. It's a lot of the legacy platforms, kind of pure marketing platforms that exist independent of data. Think of the Salesforce Marketing Clouds of the world, but kind of like that grouping. We also see people coming as we've reached parity on all channels. For a long time we had invested really at all in mobile channels.
As we've invested in push notifications and those other mobile channels, we also see that people potentially coming from other newer age platforms, but still kind of like platforms that don't have the data layer underneath.
I see. Okay. You are starting to see some Salesforce Marketing Cloud-type migrations.
We see a lot of.
larger.
Yeah, a lot of those. That's always been kind of the story on the top end, which is either you're a Klaviyo customer who grows very quickly, then we end up serving you on the high end, then you don't move off of it. You consider these other platforms, but you don't move, or those legacy platforms have always been the big incumbents of then people moving to Klaviyo from those legacy platforms.
I see. Then as we think about the low end of your customer base, kind of more the entrepreneurs and maybe obviously the low end for Shopify is not.
Yeah
where you play, but one of the things many software companies have called out in this most recent quarter was weakness in top-of-funnel, particularly the SMB-focused names. Shopify did not see that, they had a great quarter on all fronts. But what are you seeing there and how are you managing that top-of-funnel dynamic just given all these headwinds and changes to traditional search?
Yeah, so our customer base, when we think of the low end, we're typically focused on those low-end entrepreneurs who you think of have kind of found product market fit. And so, I may be a new brand, but I know how to make the things I'm making. I've figured out how to get my first 100 customers. So in some ways these are not truly day one businesses, but they're just a little more established.
And, I think very similarly probably to what others have reported in Shopify or specifically Shopify is we've seen those businesses have remained good businesses and some of the dynamics of where the demand comes from have changed. But a lot of it is very similar and we haven't seen that there's a massive shift in those businesses or kind of like that set of our customer base. It remains largely consistent with what it's been.
Right. And just in terms of how you're approaching that top-of-funnel search discovery, whether it's AEO, what are some of the Because again, I think the net ads have been very healthy-
Yeah
for Klaviyo. Maybe this is a dynamic of B2C versus B2B, but what are some of the things you guys are doing to make sure that you're still staying in front of customers, whether it's on an AI search versus traditional search?
Yeah. I think one is we've always thought of growth as being excellent at providing tremendous customer value. What that means is, one, you can is highly leaning into partnerships. So like where we can lean into folks like Shopify or others to actually drive tremendous value for their merchants. It's not that they're actually sending us demand. It's not like the Shopify App Store is driving the business.
It's more like as we become the platform that merchants know drives value for their businesses across that platform, we find that it's a very strong word-of-mouth dynamic. And so it's very consistent demand if we can truly own platforms. That's remained true. I think second is we've seen just the marketing is changing.
To your point, there's all sorts of, whether it's a rise in AEO or other things, it's leaning into everything, but we've seen that that's purely really additive. So it's just the same how do we do the things we've been doing?
Most of those still work. What are the things we can add that continue to work? It's not a fundamental shift in the environment. It really is continuing to lean into the things that work well and add the things that are adding value atop them.
Got it. Okay. I wanted to ask you about some of the growing, but earlier on channels like SMS and obviously you have even WhatsApp and some of those things. And not to make the question about gross margins because I know that's not your world, but it certainly comes up, just given the nature of those products.
But I guess the question for you is as we think about those channels, clearly critical to how those customers kind of do business, what is, I guess the strategy from a pricing perspective? I know there's been different approaches as it relates to passing on the carrier surcharges and not. But then once you get them to SMS, is there another higher margin service or platform that you're hoping to upsell them with? So a couple of questions.
Yeah. First, what we see writ large with channels is for any given brand, the channel mix will be different. There are some brands that can be more SMS heavy, some that are less SMS heavy. For any given consumer within a brand, those channels are also different as well. I might, for one brand, I visit the website a lot, so get personalized there.
I receive a certain amount of email, and I only want to receive SMSs when a product is delivered. For a different brand, every time there is a new product, I actually want to see the new pair of Tigers or whatever via SMS. That mix will shift and to some extent, we will provide a lot of intelligence to drive what those channels are, but consumers also have deeply ingrained preferences there.
As we think about margins, it is true that as we own all channels, we have historically, on SMS specifically, when we launched the product back in 2018 or 2019, made the decision to make that buying process for a very new channel, very simple.
We said we are going to layer all the carrier fees into that as a single price point, makes this channel very easy to adopt. As we have gotten larger and people are much more familiar with the channel, much more we say, okay, people understand the channel now, we can disentangle the carrier fees from the buying process. We can actually change how we are charging for this. We continue to think of these channels in the same way, where we actually have control of how our customers buy, and we will continue to do that.
Now, more and more what we see though is like yes, there are the charges for the core platform, like the data layer and a lot of that pricing manifests through the messaging using top of it. But more and more we are seeing customers buy multi-product, and we expect to see that to be a much greater trend. So buying, not just multi-channel, but buying marketing analytics, buying things like K:Social, buying things like Customer Agent atop those.
Then more and more usage of tools like Composer. It really has become a, hey, we have got control of how we make money and how we charge for the market layers, and that is evolving particularly for SMS, but we are seeing SMS adoption rising very quickly. So we will see some margin impact, but generally it changes, but the real thing is very strong multi-product growth over time. The consolidation story remains very real for Klaviyo.
Got it. Okay. I did want to pause to see if there's any quick questions in the audience in the last few minutes here. Okay. We'll keep going. I guess just as you think about the topic of agentic commerce, right? I think a lot of hype, but there's also the reality on the ground of people still want to buy products and have a relationship with brands. Where do you think we are now? What are you seeing in your customer base? How is Klaviyo's strategy, how does that tie in with where you see it going?
Yeah. When we started Klaviyo, very consistently, one reason we decided we ultimately want to bootstrap is we got this very consistent message that was like, "Hey, retail's done. No one's going to buy anything in person anymore. No one's going to buy anything from a brand. Everyone's going to buy everything from Amazon." There'll be a single point of all transaction, and that is the way the world worked.
What we realized is like, well, it's just blatantly not true. There are products that are highly commoditized where this is absolutely true, where almost all their purchases occur, in some segments of the economy, there are people who everything occurs on Amazon for these commoditized products. There's some segments where people are absolutely walking to retail every day, and there's segments where people are building these very strong digital relationships with brands.
We've seen a tremendous rise in those businesses and those merchants. As we think of agentic commerce, we firmly believe that we'll continue to see similar dynamics where there will be a strong rise of tools that let people buy in different ways. We'll continue to see that consumers, for some brands, want to build deep relationships. For some brands, don't want any relationship at all.
But that consumer preference and how they act on those may be through an agentic tool, but from the brand's perspective, brands want to understand their customers, provide those customers a great experience, and personalize those.
That there might be another layer in the middle for some consumers, for some types of brands, and we fully expect that. But it doesn't change that from the brand's perspective, you want to understand those customers and provide a very deeply personalized experience.
We're not going to let go of all consumption to a model and have that model drive all purchases. I think it'll be a huge change in how we think about it. It's very hard to predict, but the idea of personalized consumer experiences and consumers' desire to be individual and make choice, will manifest in how they build those relationships with brands.
Yeah. No, that's super helpful. My colleagues and I hosted a bunch of meetings out at the Cannes festival
Mm. Yeah.
this year, and one of the dynamics and key themes we heard was just this idea that people may have under-invested in brand spending and brands. It's going to be that much more important to distinguish from kind of all the AI-created slop out there, right? How do you see that? I guess, is that something you're seeing and then how does Klaviyo potentially benefit from that?
Yeah, we're definitely seeing it. The example we would've gone to at one point was like, people like toilet paper, total commodity. But then we see there's these very rapidly growing toilet paper retailers where people have relationships with brands and think of it very much as the choices they make drive their identity. I'm making the environmentally conscious choice.
I'm making where this is manufactured. Those are just very real. Klaviyo-wise, when we think of our reason for being, it's providing that deep customer understanding across those brands and then the intelligence atop. More and more it's the then next step agents atop that to actually drive the strategy and implementation to actually drive it atop that.
For us, it is really our sweet spot of like, hey, when we started 12 years ago, we thought it was very obvious that you had to have all of that data in one place to build a strong digital relationship to drive the impact of a brand. We thought within 2, 3 years, Salesforce, Mailchimp, all these companies would build the same stuff and start from the data layer up.
What we realized is like that actually is a very hard problem that we just happen to have been working on for a long amount of time. But it is still true today, and it is even more true because you have the AI tools on the other side, which is you have to have the data and the customer understanding to be able to drive the customer outcomes that you actually want to drive.
I think we are just excited. We have this saying internally that we are 1% done, and in the age of AI, you can build more faster and you can do more for customers to drive value. And the core data underneath is just more important than it has ever been.
Awesome. Well, I think that is a great place to end. We are right at time. Ed, thanks so much for joining us. I know it is a busy week, and appreciate everyone coming to the conference this morning. Thank you.
Thanks for having me.