Xero: great traction but at what cost?

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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Tagged as: Telecom New Zealand, xero