Square’s Mobile Payroll App = More Disruption?

Square’s Mobile Payroll App = More Disruption?

Yesterday I saw a bunch of news alerts, emails and tweets regarding Square’s announcement extending its existing desktop small business payroll service to its mobile app. Reading through some of the news, Square’s announcement moved its stock favorably and trimmed a little from the valuations of ADP and Paychex – a combined $91 billion.

A story on CNBC suggested that an “S” be added to the FANG acronym (for Facebook, Amazon, Netflix and Google) due to the considerable disruption that Square is causing.

Square is slowing but surely building out a mobile app platform that could one day do most, if not all, of the important business functions that SMBs rely upon. Yet when talking to SMBs, as I often do, I almost never hear about Square — my dentist doesn’t use it, my dry cleaner doesn’t use it, my favorite wine store doesn’t use it and my contractor (yes, an older guy) still only takes paper checks. Sure I see Square at the Marin Farmer’s Market and the upstart food truck and hot new ramen shop — but its not yet pervasive. And further, most Square users do not engage will all the elements of its platform. Payments volume is still its key revenue driver.

In fairness, this is an issues across the board among companies offering the “full stack.” Speaking at LSA ’18 this past spring, Zoho President Raj Sabhlok admitted that the typical Zoho One user actively used about four of the suite’s 40 business applications.

If we looked at the SMB dollar value of transactions processed by Square vs. the rest of the SMB dollar volume, we’d probably see chart that suggest Square does a high volume of low value transactions. In Q2 2018, $21.4 billion in GPV (gross payment volume) passed through Square’s platform. In Q1 2015, that figure was $7.1 billion.

And while that’s a great foothold into the SMB market, time will tell if Square is as disruptive across the entire SMB ecosystem as it’s $39 billion valuation would suggest. Don’t take that as a shot against Square — but perhaps a caution against moving from FANG to FANGS just yet.

Square’s deeper moves into payroll intensifies its competitive position vs Gusto, the leading challenger in the crowded SaaS HR and payroll space. Gusto’s head of marketing, Tolithia Kornweibel, will be a featured speaker at the LSA’s Tech Adoption Summit, Nov. 6-7 in San Francisco. We’re confident Square will come up in Q&A. The event has limited seating and is expected to sell out, so be sure to act soon if you are planning to attend.

 

A Peek into the World of MSPs and IT Providers

A Peek into the World of MSPs and IT Providers

I recently attended an event outside of Boston put on by the team at ChannelPro – ChannelPro SMB Forum. Like many trade shows or conferences, there were presentations and workshops and exhibits. Overall it was a super interesting mix of Managed Service Providers (MSPs) business owners, software distributors and consultants.

Some of the big players at this event — IngramMicro, datto, Synnex, CompTIA — are not household names to those in the local media space. But these companies play a critical role in helping SMBs run efficient businesses from a technology and communications point of view.

I’ve been exploring this IT ecosystem as it relates to small businesses. Specifically, I’ve been curious about the of world of MSPs. These are the businesses that help SMBs with technical support for cloud storage, security, data back up, SD-WAN (software defined Wide Area Networks) and other IT needs that small business cannot or would rather not handle themselves.

Estimates suggests there are roughly 40,000 MSPs operating in the U.S., with the majority being SMBs that service other SMBs. One of my emerging observations is that the communities of marketing solution providers and IT providers (MSPs) are on a collusion course.

Here’s why. Both communities are looking to gain a larger portion of their customer’s monthly budget — more wallet share. As many of their existing products and solutions become commoditized, they will need to find new solutions that place more and deeper hooks into the business owners systems. Hence the possible outcome could be that each begins to offer the solutions usually offered by the other community. Simply said – the IT guys may well offer marketing solutions and the digital agencies may well consider VoIP and security solutions to extend their customer ARPU.

Time will tell but this is an area I’ll be helping the LSA and Tech Adoption Index team explore over the coming months, quarters and years. Do you have a point of view on this? We would love to hear from you.

Gusto Sees Big Opportunity in Fragmented Payroll Space

Gusto Sees Big Opportunity in Fragmented Payroll Space

For sometime now I have been pointing to Gusto as the poster child for disruption in the SMB cloud space. Many of you have heard me talk about how Gusto has been squarely focused on taking market share from the two largest SMB payroll providers – ADP and Paychex.

In a recent interview in Pymnts.com – Gusto CEO and Co-founder Josh Reeves talked about how taken together ADP and Paychex have perhaps 20 percent of the SMB market for payroll and have a combined market valuation of about $85 billion. So for Gusto to be very successful they don’t even need to take share from the big two in the space. They can simply convert those millions of SMBs using paper and pencil to their cloud-based platform.

Gusto made big news last week when it closed a $140 million Series C round, brining its fundraising total to $316 million since it was founded in 2012.

In the Pymnts.com interview, Reeves talks about the challenges they face in selling to the SMB market. Like many SMB SaaS players, Gusto struggles with the daunting challenges of acquiring customers at a reasonable cost. Gusto relies heavily on word of mouth and platforms such as Captera, where Gusto is among a number of SaaS payroll companies for SMBs with 5 star reviews. They also use paid advertising to drive warm leads to their inbound channel.

One of Gusto’s newest initiatives FlexPay – essentially a cash management opportunity for employees of Gusto customers. As Reeves describes it, the kid who cuts the grass on a hot summer day for Dad doesn’t have to wait for two weeks to be paid. Applying the same logic to payroll, Gusto will enable a employer to pay an employee when they need the cash which isn’t often in sync with when the bi-weekly check is cut.

In the longer term, Gusto is positioned to go up market, to larger companies and enterprises where the sales cycles will be months and years instead of days and weeks. But, like companies such as DocuSign, those deals can solidify a company’s position in marketplace that is worth billions of dollars.

When we last wrote about Gusto in March, the company had topped 60,000 customers and had added a free service called HR Basics that handled simple HR functions for SMBs. The idea behind basics was to use the free service as a leads channel to upsell SMBs to a paid service.

Gusto’s Marketing Director Tolithia Kornweibel will give a headline talk at the LSA’s upcoming Tech Adoption Summit, November 7 in San Francisco. She will also be featured in an upcoming Above the Cloud podcast. We encourage you to register soon for this event. Space will be limited at The Laundry San Francisco, so the event is expected to sell out. Early bird rates expire on August 31.

What Metrics Drive SMB SaaS Companies?

What Metrics Drive SMB SaaS Companies?

The Tech Adoption Index team is on a journey to deliver insights that matter to the community we are building in the small-business software world. One item on our checklist is an examination of key operational metrics in the SMB SaaS world.

There are many good sources of SaaS metrics out there. SaaStr — the B2B SaaS tracking company — is a great source for all things SaaS. Most of its content focuses on how to sell SaaS to global and large scale enterprises. Another great source is the work the team at KeyBancPacificCrest does each year ahead of its two major technology events in Vail and San Francisco. They build tables and charts of many key SaaS metrics that are very helpful.

We’re not looking to reproduce what either of these well-established sources already provide. Instead, we’re looking to help teams that sell SMB SaaS understand the same key metrics that SaaStr and KeyBancPacificCrest track, but at the SMB level. Enterprise SaaS metrics have limited value in the SMB space.

The Metrics that Matter

Customer acquisition cost (CAC) is a term that gets thrown around in VC boardrooms, at management team off-sites and among those in revenue, sales management and finance leadership roles.

So what is CAC, how is it calculated and why is it important? A good starting point is this piece in Andrew Chen’s newsletter, offering a very useful discussion of CAC and some of the nuances of the calculation. In essence, CAC is the fully loaded cost to acquire a new customer. This calculation should include all sales and marketing expenses including salaries, marketing and advertising expenditures and any SaaS tools used in sales and marketing activities.

So we’ve been asking around the SMB SaaS community and have discovered some preliminary guideposts for CAC metrics in this space.

Our discussions led us to a typical SMB SaaS CAC being in the range of $1,200 to $1,600. This is for companies selling a SaaS solution in the range of $100 – $200 per month, which is a fairly common range for SMB software products. We have heard from others in the SMB space who had CAC metrics in the $400 – $600 range. These CACs are considerably lower and are often a function of selling into a narrowly defined market e.g. HVAC service providers, having a business model that is volume or transaction centric and may also be a function of relying on offshore SDR (sales development reps) teams.

These guideposts need to be considered in the context of two other key metrics — average customer value (ACV) and churn. The simple math is that the higher CAC is, the higher ACV needs to be and the lower churn needs to be to drive a profitable business model.

How does your CAC compare to these guideposts? We’d love to hear from you privately. We’ll do some discovery around ACV, LTV (lifetime value) and churn and share our findings in a future post.

Charles Laughlin and I also discussed this topic on our most recent “Above the Cloud” podcast. Listen here:

Wisps of the SMB Cloud in Meeker’s Internet Trends Report

Wisps of the SMB Cloud in Meeker’s Internet Trends Report

Mary Meeker recently released her annual PowerPoint magnum opus on Internet Trends so we thought we’d pore over it to see which nuggets were most relevant to our coverage area — the small business cloud and the emerging SMB technology stack.

We found a few relevant items among the report’s 294 slides. There weren’t many stones left unturned in this report.

Digital Payments (Slide 18)

Citing data from a Visa report, Meeker makes the point that six of the last 10 consumer transactions survey respondents reported are now occurring digitally.

This is a very telling statistic that underscores a few themes central to the Tech Adoption Index. One is the notion that SMBs lag national brands in terms of delivering a modern, quality customer experience, at least as it related to technology adoption. And the closely related point that SMBs routinely lag consumers in terms of providing them with an experience in keeping with their use of technology.

Failing to keep pace with payments technology is one area where SMBs can lose business to big brands as well as newer small businesses that are born as cloud natives.

 

Messaging (Slide 22)

Meeker aggregated usage data reported by the leading messaging apps (Facebook, WeChat, What’s App and others) to make the point that use of messaging apps is exploding and has become the primary means of communicating for (and with) many consumers.

The message for SMBs is the same as it is with payments. Give consumers the experience they want, or they will chose to work with a business that will.

As with everything else related to technology and customers experience, small business are lagging in terms of the mode of communications that consumers prefer. Consumers want fewer phone calls and emails, more SMS and IM. The younger the consumer, the more this is the case. SMBs must keep pace with changes in messaging technology.

The SMB Tech Stack (Slides 51-56)

We also found something akin to the SMB Tech Stack conversation we’ve been having at the Tech Adoption Index, here on our blog as well as on stage at industry events, on our podcast and elsewhere.

Meeker illustrates how companies are beginning to build stacks from the starting point of a single point solution. She cites Square, a company we often hold up as an example, noting its expansion from point of sale into payroll, lending, invoicing and analytics. Her perspective was around e-commerce, but the same logic applies to any number of stacks, from marketing to payments and finance to supply chain, IT and any other mission critical SMB application.

The underlying driver of this is the desire to drive higher customer yield and lower churn. And as Vendasta demonstrates in its new churn report, offering the full stack is clearly a churn buster, with clear lift on retention for each additional product sold.

Update: You can listed to our conversation about Mary Meeker’s findings in our debut episode of the Above the Cloud podcast.