Xero's new pricing is OK

by admin on January 20, 2009

in Cloud Computing/SaaS,General

xeroiphoneUK pricing for Xero is being reduced from £28 to @19 per month. The announcement is on the sponsored feeds area, I’ve received emails about it wondering whether it is tough times and CloudAve is using the occasion to have a dig at Xero.

Ben Kepes CloudAve posting is egregious in its misrepresentation of what Xero is and drawing comparisons with Kashflow and FreeAgent. He says:

The UK seems to have a real abundance of SME accounting providers – KashFlow, FreeAgent Central and Xero are all competing in a similar space. KashFlow and FreeAgent (CloudAve reviews here and here) are both below the new Xero monthly price (although the gap is more palatable than before Xero’s move).

All of that is true, with more providers entering the market. But it masks the fact that each product has different capabilities and appeal in the market. Neither does it take into account the fact that Xero is correct to refer to price alignment. Check the ZN$ and GBP exchange rate.

Tangentially – does Ben have a point about the general cost of saas solutions? So far we’ve seen emerging solutions that tend to do one thing very well but they are not the fully baked article. A few days ago, FreshBooks announced it has integrated with Oprius CRM. As an incentive, Oprius is offering a one time $20 incentive. The service costs $14.99/month. FreshBooks costs from $14/month but as realistic price in any small business is going to be $27/month. Put the two together and you’re facing $42/month or about £30. That’s not too bad, even with a lousy exchange rate. Whether you get value is another matter but I would argue that even at these prices, saas is a high value proposition. Why?

It comes back to my oft repeated refrain that saas allows collaboration in ways that are simply not possible with incumbent systems. They help collapse time and therefore help dissolve the problems that latency encourages. Back to Xero.

Xero is on an aggressive growth plan. It knows the UK represents a solid market for its wares and a genuine alternative. That costs money, takes effort and time. The company is being brave given that its cash burn rate recorded in its last reported accounts looked frighteningly high. But then I know from many conversations elsewhere that bringing a general saas solution to larger markets is hideously expensive. Heck, even the mighty Salesforce.com is only barely profitable.But a bare reading of the acccounts doesn’t tell the whole story by a long stretch. Check what happened with Twinfield from 2006 and 2007 to see what IS possible with the right business model.

twinfieldaccountsWith those thoughts in mind, I spoke with Hamish Edwards who is leading the Xero charge in the UK: “We announced a global product in December and it didn’t make sense to have pricing in different territories that was out of line. That is especially the case with the plans we have im place for further expansion.” Asked how the market is performing for Xero, Hamish added: “We’re certainly doing as well as we epxected and then some. I can’t get into the specifics but I’m more than happy with progress.” I’m not surprised. Counter cyclical economic conditions favour saas models because they remove the requirement for a capital outlay while providing a predictable outgoing.

I have long held the view that saas accounting applications have almost no intrinsic value except for the collaborative opportunities. The real value is in the data. I envisage a number of business models built around saas data but so far, I’ve not seen any vendor really try and leverage it. It’s probably too early. Therefore, in the models I look at, saas could almost go free – say £5 per month. We’re some way from that and as Hamish said: “We’re not seeing any price pressure yet.”

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Ben Kepes January 20, 2009 at 5:39 pm

Dennis – it wasn't a dig I was having, it just seems strange to reduce price even if their is "no downwards price pressure". I understand the global pricing issue but as Mark says it still seems to be at least in part a market response

Dennis Howlett January 20, 2009 at 9:01 pm

@Ben – You've got this hideously wrong and are speculating on something that's not there.

I spoke at length with Hamish this morning. Remember they're a public company. If you're implying there was an ulterior motive then you're also implying they're witholding important market information. Given the company's profile and the attendant risks, do you seriously believe that's what they'd do?

The counter argument is that price reduction puts pressure elsewhere and may lead to a volume transfer.

We'll know in the fullness of time but read also what Hamish said about trading conditions. His assessment reflects what I see happening in the UK market because no-one is telling me that they're struggling to find the right price point.

Mark Davies January 20, 2009 at 5:55 pm

Dennis, I agree with your comment about (long term) value, but the price adjustment by Xero looks like a response to the market rather than just a consistency issue. Wouldn't you agree that their previous entry point was a little high for the really small businesses who are the volume end of the target market, so they had to do something even if they don't want to admit it?

We came across this same issue prior to launching e-conomic in the UK and adopted a pricing model that meets the needs of the small businesses by giving them a low entry point but all of the functionality. If they stay small they will always be charged the small price, but if their business grows and they start to exploit more of the system, they will eventually switch seamlessly onto the standard price level which allows for unlimited business activity. We measure the change by tracking the number of accounting entries that are being created on their books. It's a simple mechanism, but it seems to work and customers rarely complain, so they must feel that they are getting fair value.

Interested to know your thoughts.

By the way, talking of value, we agree with your comment on intrinsic value. The industry has barely scratched the surface on that front, but one area that's seeing some focus is providing value to the accounting service providers. There's some real innovation going on in that space that will drives cost out of the process as well as enabling new service models.

Dennis Howlett January 20, 2009 at 6:02 pm

@mark – I called up Hamish specifically on this point. If you look at the exchange rate you'll find the price is equiv to NZ$49. Global pricing makes a lot of sense. Otherwise it gets horribly confusing. It doesn't matter what the previous entry point was.

There is a side issue here concerning pricing. It's almost impossible to know what to price saas at because the concept is so horribly confused in the marketplace with plenty of people attacking the pricing mechanism as an alternative argument. That's spurious in my opinion for all the value reasons I've said in the past.

Yes – I agree there are different approaches to the model. It's a matter for each company to judge.

What do you mean by 'accounting service providers?' Are you talking about the CA firms or something else? I'm aware of a number of initiatives but it depends what you're talking about.

Mark Davies January 20, 2009 at 6:07 pm

@Dennis – yes, the CA firms. Being able to access a client's accounts directly is useful for them to some extent, but providing tools that improve things like operational speed, agility and staff/client ratios is of real interest because it can drive down to the bottom line. Happy to discuss in detail, but would have to be offline for now.

Duane Jackson January 20, 2009 at 9:40 pm

So when there's another big change in exchange rates, will there be another change in the cost?

I'm assuming the price cut is being passed on to existing UK subscribers. Percentage-wise that's a big cut – I certainly wouldn't like to see that sliced off my turnover. I can only assume that the number of UK customers Xero has makes the actual financial amount negligible.

As for pricing pressure – KashFlow is the leader in web-based accounting in the UK. We can debate whether we have 70% or 50% or 40% of the market – but I’d have thought anyone would find it hard to argue that we don’t have the biggest slice of the market.

One fact: We charge half of what Xero were charging prior to the price cut.

I'd have difficulty believing that our pricing was not taken into consideration when this decision was being pondered at Xero HQ.

Dennis Howlett January 20, 2009 at 10:13 pm

Duane – please don't kid yourself. And don't worry, we will have that debate in the fullness of time but in the meantime I suggest you check out how WinWeb is getting on before making those sorts of claim.

As an aside – this is one of the reasons that independent people like myself undertake market sizing and analysis. Keeps you marketing people in check -;)

Duane Jackson January 20, 2009 at 10:41 pm

Can you point me in the direction of some data on how many paying customers WinWeb have in the UK? Not free accounts or "registered" accounts. Actual paying, active customers.

Ben Kepes January 20, 2009 at 11:22 pm

@Dennis – I never said they were witholding information or had ulterior motives, rather that, at least in part, their decision is based on market forces.

Anyway – all a done deal now, I'll shut up and just watch the progress Xero makes – all power to them!

Rayanne Langdon January 21, 2009 at 1:17 am

Gotta love a good argument over money! Hah. I agree, Dennis, that SaaS pricing is very complicated. It's a bit of art and a bit of science, and definitely requires many hours thinking about reasoning a lot of people won't understand.

Rayanne Langdon — Marketing Coordinator, FreshBooks.com

James Brewis January 28, 2009 at 8:33 am

If it looks, smells and tastes like it's best of breed, as Xero does, then a premium price point will provide a prospective customer with a degree of comfort that they are, indeed, buying best of breed.

Accordingly, I'm a bit surprised that Xero have pitched their global pricing at the USD 29 level – if ever there was a USD 49 product, this is it.

For established businesses, there are far bigger factors than price at play in making the decision to switch to the SaaS accounting solution, not least the perceived cost of moving historical data and the benefits that the new product over the old.

Simon January 30, 2009 at 11:23 pm

I twittered about this yesterday – Xero is insanely cheap for larger businesses but is overpriced for small one-man businesses (at least it is here in NZ). I know it would be messy to implement but maybe their pricing model should be based on the number of invoices generated per month rather than a flat fee for all users?

The main problem I see for Xero is they are building a Rolls Royce product but they have Rolls Royce-like internal costs so I can understand the strategy behind their current pricing model.

Dennis Howlett January 30, 2009 at 11:35 pm

Sorry Simon but I don't recognize you from Twitter. Regardless of what Xero's pricing strategy looks like, they are creating a product the market seems to be embracing and are well on target to meet their objectives in this financial year. Of course we won't know the extent to which they've achieved that until a little later but I see no signs of them stumbling.

Simon January 31, 2009 at 1:24 am

I've just started following you on Twitter this morning Dennis.

Don't get me wrong I use Xero for several companies I'm associated with and I love the product and believe they will eventually achieve great success. However their current pricing structure is a barrier to entry for some. I have mentioned Xero to many people who have trusts which only process a handful of transactions per year but would love to use Xero to manage things but is just not practical under their current model.

Andrew Bruce Smith February 2, 2009 at 3:00 pm

For what it is worth, I've recently become a paying Xero small business customer – and I think it is tremendous. I've been running my own businesses for nearly 10 years, and I've tried most of the trad accounting packages – my experience with Xero so far has been v. positive compared to the normal fare. At £19 a month it is a no brainer. All I can say is I hope that more people do start using and paying for it – and the company continues to be successful. I'd hate to have to go back to using the traditional packages that have been foisted on me in the past.

Dennis Howlett February 2, 2009 at 3:31 pm

Blimey – that's good to hear Andrew and unusual As I'm sure you know, people tend to write about stuff when they're ticked off so to hear a positive story makes for a welcome change.

Andrew Bruce Smith February 2, 2009 at 3:48 pm

Xero seems to have been written with people within the client business in mind rather than the accountant (though I would have thought it would make accountant's lives easier too). I'm guessing that Xero's appeal is to people like me ie smaller business/owner managers that want something that can act as both a statutory and management accounting tool. Xero customer support has been excellent so far – I had a free one hour, one to one online tutorial session that really helped me get to grips with the nuances of the software. For example, I hadn't clocked the tracking facility – now I have instant snapshot of client profitability for example. The e-mail invoicing facility is also neat – I know for a fact there are so many small biz people out there still wasting time on rickety spreadsheets and MS Word generated invoice systems.

The whole SaaS element is interesting too – as the Xero community grows, I'm sure there is value to be gained from users sharing tips and insights in a way you would never do with a standard desktop package (parallels with Wesabe in the online personal finance space?)

I never thought I'd hear myself saying this about accountancy software, but I actually enjoy using it. And spending time telling other people about it. What has the world come to ;-)

(And no, I don't handle their PR – whoever is doing it, has got a great client on their hands – envy).

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