Heading Towards A Shake-Up: The Cloud Business Apps Market According to Zoho

Last week I had the opportunity to attend Zoho Day 2019, Zoho’s analyst and influencer event.

Zoho is on a path that lies in stark contrast to the norms of the cloud software industry. The private, bootstrapped and profitable company sells over 40 business applications, three functional area suites and an all-inclusive ZohOne bundle (Figure 1). Leveraging a generous freemium model, Zoho now serves more than 41 million users in 180 countries. With pricing that can be exponentially less expensive than competitors, Zoho has also grown its paid subscription customer base to more than 331,000 accounts—primarily from the ranks of small business.

Zoho’s founder and CEO, Sridhar Vembu, takes the position is that software industry is ripe for a shake-up—and that its approach will not only help the company weather the disruption, but capitalize on it.

Figure 1: Zoho Offerings

Commoditization Ahead

Why, posits Vembu, do cloud business software prices keep going up, even as software development gets easier—and while prices for other technologies continue to drop over time?

From Vembu’s standpoint, this is the result of a vicious cycle: Venture capital companies pump billions of dollars into the industry, which puts pressure on vendors to grow big enough for an IPO—and forces them to spend upwards of 50% of revenues on customer acquisition. As sales and marketing costs spiral, profitability becomes elusive, so vendors raise prices and double-down to cross-sell, upsell, and make acquisitions (most of which fail to add value) to grow. The result is over-priced, often bloated software that doesn’t deliver the value that customers need.

Vembu has contended for several years that forces are converging that will disrupt this status quo. Populations are growing in emerging and less affluent markets, and younger workers are becoming decision-makers. These new constituencies want modern, robust, connected business applications—but will opt for solutions that are faster and cheaper to deploy, and easier to use than what most vendors currently offer.

Of course, the established business software model isn’t dead—yet. But, Vembu believes that it’s only a matter of time until Amazon gets into the game. When it does, it will bring the same scale, efficiencies and downward price pressure to the world of business software as it’s done in so many other markets—provoking an upheaval in the industry.

Zoho’s Approach

Zoho’s market approach rests on three pillars:

  1. Products: Provide sophisticated, yet easy to use software for a broad range of functions, with deep cross integrations. Rapid innovation and updates are evidenced by a steady stream of new solutions and continual infrastructure improvements.
  2. Value: Deliver full features, at a low price, without cross-sell and upsell pressures.
  3. Ease of doing business: Make it easy for customers to discover, try, buy and implement Zoho solutions, whether single solutions, bundles or the full Zoho One suite. Customers can upgrade or downgrade editions and licenses at will, and are not locked into multi-year contracts.

This approach is backed by Zoho’s unconventional business model, which Vembu believes will help it not only to weather, but prosper when the shake-up occurs. For instance:

  • Zoho has forsaken venture funding and intends to stay private, so it doesn’t face the growth pressures that investors and Wall Street demand. While the company is profitable, Zoho isn’t out to grow at all costs—sustainable growth is the goal. Zoho believes that by providing robust freemium options, affordable quality, and a positive experience.
  • Zoho’s operational model yields substantial efficiencies. The company builds and runs its own infrastructure in eight data centers, and claims this saves it 50 percent or more of what it would pay to use AWS or Azure. Zoho recently purchased 360 acres for a new facility in Austin, and plans to use some of them for solar panels to power a planned data center there.
  • About 80% of Zoho’s 7,000-plus employees are in engineering, product management and support roles—the inverse of some of its competitors. The bulk of its engineering staff is in India, where Zoho has tapped into non-traditional talent pools for years. For instance, Zoho established Zoho University in Chennai, India in 2004 to recruit and train students who otherwise would have limited educational opportunities. Zoho trains them to program, pays them a stipend, and then hires many of them. Currently, 15% of Zoho’s engineering employees are Zoho University graduates. Zoho is now extending Zoho University in the U.S., with a pilot program in Austin, Texas, and is expanding beyond engineering to offer training in marketing and design.

Zoho’s cultural values are also key to its sustainability equation. The culture is competitive but not pressure to sell at any cost. According to Vembu, this cultivates a “freshness of spirit” often lacking in high-pressure sales environments. Zoho’s also claims that its employee attrition is among the lowest in the industry.

Zoho’s Trajectory  

Zoho is growing. In 2018, it added staff opened new offices in the UK, France, Germany, the Netherlands, Singapore, Mexico, and Australia.

Zoho added three new products last year, including Backstage for event management; PageSense, a CRO platform, and Flow, an application integration platform, which has already been used to integrate over 250 third-party apps with Zoho applications.

The company also revamped many of its existing products. It retooled Zoho Analytics to work better with third-party apps; enhanced Creator’s custom app development capabilities; and extended CRM with the CRM Plus Unified Customer Experience Platform.

On the marketing front, Zoho has been ramping up outreach and event presence at third-party trade shows, its own Zoholics user and Zoho One prospect events, and at partner events and meetups.

While Zoho’s roots are firmly planted in small business (80% of their customer base is small businesses with 1-100 employees), the company has been gaining ground in the midmarket, and in department levels in large companies. Interestingly, it has even delivered private cloud versions of Creator and Analytics to larger firms that needed to run these solutions in-house.

More than half of Zoho’s customers are from North America, but Zoho is steadily diversifying across the globe—especially in several emerging, high growth markets.

Since Zoho is private, it doesn’t publicly disclose revenues or growth numbers. But the company privately shares numbers that indicate strong momentum in terms of customer growth, and a steady rise in average deal sizes.

Perspective

Almost all markets eventually commoditize to some degree. The question is to what degree, and how quickly, will this happen in the business software space? Of course, if Vembu is correct, and Amazon does enter the market, it will certainly accelerate the pace.

Other factors will also come into play, such as demand in cost-sensitive emerging markets for less costly solutions, as well recessionary fears which will cause some companies to tighten their wallets. Remember when customer demand for cloud software spiked in the 2008 recession?

Regardless of the degree and pace of how these trends unfold, Zoho’s value proposition—products, value and ease of doing business—should stand it in good stead, both in its small business stronghold and increasingly, in the midmarket.

However, Zoho will need to take its value proposition one step further to super-size its growth. Just as it has created “sophisticated software that’s affordable and easy to use,” the company will also need to develop and deliver services that are sophisticated, easy to use and affordable.

Cloud delivery takes the technical obstacles out of consuming software, but hasn’t really addressed the business process issues of getting the software to do what it needs to do to deliver the desired outcomes.

As a result, consulting and implementation costs still run three to four times the cost of the software for most cloud business apps. While cloud apps typically provide faster time to value than on-premises alternatives, it can still take months to get up, running and productive with them.

Until Zoho—or someone else—figures out how to change this equation, the bottleneck to getting value will remain, slowing down the technology consumption rate.

Can Zoho—or Amazon—or someone else—figure this out? I suspect that over time, vendors will put artificial intelligence, machine learning, natural language progressing, augmented reality and other emerging technologies to work to at least make progress toward this goal—and truly challenge the incumbent business software model.

© SMB Group

Source: Laurie McCabe’s Blog

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