Xero: great traction but at what cost?

by admin on October 28, 2008

in Cloud Computing/SaaS,General

I’ve just had a good look at Xero’s 6 month numbers to 30th September, 2008.

2,200 paying customers paying $NZ 333,000 = growth of 978%

Operating loss: $NZ 3.465 million

The company says results are in line with expectations. Be that as it may, the cash burn rate is a heavy burden for a company that is trying hard to make a name for itself as a global saas provider on relatively limited resources. According to the company’s blurbs:

In the current global economic conditions, the Directors are focused on ensuring the careful
management of the Company’s costs but recognise that to build international sales momentum there must be a concurrent focus on business development and the establishment of marketing partnerships in the geographies where the Company operates.

There are many theories about how to build sustainable saas businesses, none of which have been proven for the long term. The two ends of the scale look something like this: the vendor is content with relatively sedate growth in a specific niche and is prepared to fund or bootstrap at modest levels. At the other end of the scale is marketing driven land grab a la Salesforce.com. Xero is going for the latter with a horizontal offering.

One of the key planks upon which Xero hopes to achieve ‘hockey stick’ growth is through a partnership with New Zealnd Telecom. Ben Kepes has the details and comments:

…from a marketing perspective I understand the benefits to be gained from this deal. From a user perspective there are a few things that would really create a value add that a partnership like this could bring such allowing for a single billing point and tight functional integration between the two companies.

Given the economic climate however it’s a great win for Xero that should see them ramp up their customer numbers, and for Telecom it builds the perception that they’re building a complete business needs marketplace for their customers.

I’m not as gung-ho. Traditionally, telecom providers have one thing in mind: selling airtime. Everything else is a ‘nice to do’ that doesn’t get enough marketing attention. Offering a business hub is a great idea but does NZ Telecom have the marketing DNA to make this type of offering worthwhile and visible to customers? If the UK is to be taken as a yardstick, the answer is a flat ‘no.’

On paper it sounds wonderful – access to a large pool of potential customers where the telco does the heavy marketing for a slice of the action in anticipation of rocketing take up. The problem is that the vendor still has to beat any incumbent and as any professional knows, getting customers to move from one accounting package to another is tough at the best of times.

Even so, the total value proposition of a saas solution remains compelling. In tough economic times, I’d go further and say it represents one of the few technical solutions through which professionals can provide a differentiated service that actively helps their clients. The question is whether the professionals ‘get it.’ Evidence to date is thin on the ground.

I have believed for some time that the key to making partnerships successful comes in providing easy on ramp. I have no insight into what Xero is doing in that regard. Elsewhere, I see precious few signs of meaningful partnerships that could help jog that process along.

Having said that, Xero has done a cracking job in getting as far as it has and remains confident of success. In the earnings release, it reiterated an earlier announcement where it said:

As was announced in August this year, the global version of Xero has been brought forward to early 2009 in response to significant interest. This will allow the Company to substantially broaden its market during the next twelve months.

According to Telecom’s numbers, it serves some 433K NZ businesses. Given that Xero is counting 0.5% of that total market (give or take for a handful in Australia and the UK) it has plenty of runway. If it continues at its current pace and grabs zero customers elsewhere then it will have acquired roughly 4.8% by volume. That’s a highly simplistic model but provides an indication of the velocity Xero needs to achieve in order to get close to extinguishing the current cash burn rate over the next year. Sentiment for saas may be in its favour, but overcoming the economic mood is another matter altogether. Reinforcing the value case certainly helps but it requires continued marketing pressure. That doesn’t come cheap without considerable ingenuity and invention.

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Chris Yeh October 28, 2008 at 7:04 am

It is dreadfully difficult to get partnerships to work. Early in its history, PBwiki partnered with Yahoo! Groups to make it easier for Yahoo! Groups users to create a wiki. Seems like a match made in heaven, right?

The relationship eventually ended amicably, but without a major boost for PBwiki. As you note above, unless there's someone at the partner whose success depends on the success of the relationship, and that person has the mojo to effect change, partnerships are always peripheral rather than core.

Ben Kepes October 28, 2008 at 12:48 pm

Dennis – interesting comments – I keep coming back to the thought that the best way to ease the on-ramp for SaaS apps is to provide seamless and "one-click) migration – similar to what Salesboom is doing for Salesforce customers – while SaaS is compelling, it's not compelling enough to suffer the agony of a migration process – if the vendors start providing that as an on-ramp service for customers they'll gain traction much more quickly

Devan October 28, 2008 at 11:50 pm

Umm…Costs weren't NZ$3.4 BILLION as reported here. More like 3.4 MILLION when you check the financials.

Dennis Howlett October 29, 2008 at 2:57 pm

@Daven – that was my EU use of commas and dots muddled for that number. Fixed. Apologies to anyone confused by my dopeyness.

Jason Holden November 15, 2008 at 3:19 pm

There are many theories about how to build sustainable saas businesses, none of which have been proven for the long term.

You are right Dennis, as SaaS is only just starting to stick and so it is too early to know the best course of action, but one of those courses has to be getting the accountants on board, let’s be honest Sage only got to its current position by partnering with accountants.

Sage did have an advantage way back when; they had an easy to use computerised ‘bookkeeping’ package which would mean accountants could get bigger clients off manual time consuming records and thus make more money.

Also at this time the only real competition was Pegasus which although a far superior product was not as user friendly and more expensive.

Now the problem the SaaS market have is to convince the accountants to move from tried and (not always so) trusted Sage onto something else, and that is the dilemma!

Just my two pennies worth.

Dennis Howlett November 15, 2008 at 6:50 pm

@jason – you are right and I am seeing that coming via my friends at FreeAgent Central. But it is more than just getting distribution. It's about onboarding those clients as well. That's the real challenge.

Dennis Howlett November 17, 2008 at 10:02 am

Things change and the professional who recognizes that and can communicate the value will be seen as pro-active, honest and more trusted.

Emily Coltman November 17, 2008 at 12:38 pm

Yes – because presumably the accountant persuaded the client to use Sage in the first place.

(S)he then has to say "no, actually we think Winweb / Xero / FreeAgent / whatever it may be is better", thereby contradicting his/her own recommendation.

Would most clients see this as being innovative – or as a loss of credibility?

M

Mark Hallett November 20, 2008 at 1:30 pm

Something that we (Xero) are seeing is that forward thinking accountants are positioning the change as an upgrade of service as well as an upgrade of software.

Of course the tide of change is not quick, but by positioning to the clients that they (the accountant) are able to deliver a better service the accountant is not losing credability.

It's all about positioning and not all do it well!

Ben Kepes November 20, 2008 at 6:36 pm

Mark

Interesting and a valid strategy I'm sure. It's just that reading the marketing spin from the UK facing SaaS accounting vendors, they all claim a huge level of credibility within accounting practices: e-conomic founded by a CA, Xero respected and endorsed by ACAEW, FAC with a (very small) holdingby Dennis and traction with the CAs.

So the pool is small as we both agree but I'd contend that there are a few sharks circling that little school of fish!

So it comes down to look and feel and killer features – automatic bank feeds anyone?

Ben Kepes November 20, 2008 at 7:01 pm

Mark

I wouldn't have expected you to ;-)

Cheers for the dialogue – talk to you soon

b

Ben Kepes November 20, 2008 at 8:36 pm

Mark

I guess my contention is that the pool of forward thinking accountants is sufficiently small, and the number of SaaS accounting products too large, for a go-to-market strategy involving accountant partnerships to be overly successful.

Very happy to be proven wrong though!

Ben

Mark Hallett November 20, 2008 at 9:29 pm

Hi Ben,

The pool of forward thinking accountants is growing and the "credible" SaaS accounting companies as seen by practice accountants is not as large as we (Xero) thought.
We are concentrating on the small number of accounting firms who "get" the service and we are seeing excellent results. Those practices who are presently unsure about SaaS will be revisited when they see the light!!

I guess we are making two points here:

1. Forward thinking practices will present the best solution to thier clients. This maybe a SaaS solution or installed solution – but the client comes first.
2. SaaS accounting solution providers who understand accountants best will promote to the right practices and revisit those others when they are ready.

So as I posted above it's all about positioning!

Mark

Mark Hallett November 20, 2008 at 9:52 pm

Ben

I would agree with you whole heartedly that it will come down to look and feel and feature set and i'm not going to comment on automatic bank feeds!!!

Mark

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