Is Zoom becoming too general?

Patrick Campbell Dec 24 2020

This week we are talking about the enterprise B2B behemoth, Zoom. Zoom is one of the darlings of the SaaS industry and I think the beauty of Zoom is both in its simplicity, but also how quickly you're able to connect to a meeting. And today, we're going to walk through what Zoom is doing really, really well when it comes to their pricing, as well as what they're doing, not so well when it and wrap up all of those learnings and all that data into a nice little case study to help you and your own monetization strategy.

 


Pricing field notes

Zoom

Zoom has become a household term since the COVID-19 pandemic locked everyone into a work- from-home environment. Even without a pandemic to help them along, the company has done a lot of things right that helped position them to become a market leader. 

Below are some valuable takeaways you can implement in your own business.

    • Freemium
      • Companies that offer freemium have significantly higher NPS scores than those that offer a free trial or no free offers. Freemium also improves retention.
      • Provide value with the right triggers.
      • Provide value without cannibalizing revenue from your paid plan.

    • Push and pull pricing done right, can work wonders
      • Pull pricing is letting customers upgrade naturally.
        • Present features in a way that customers will naturally want and need to upgrade to and they won't have a problem paying for them.

      • Push pricing is when users are required to upgrade to use certain features.
        • Think through the segments of your customers and how they grow with the different features that you offer.
        • Data shows us that Zoom has targeted their tiers to their customer segments really well. By the time a buyer needs to upgrade to another tier, they also need the features unlocked at that tier

    • Add-ons will make or break your growth
        • Know the value of your features.
        • Think about how you differentiate your features, whether you should bundle them within the product, or make them an add-on.

        • Sell rarely used features as add-ons.
        • The proper feature add-ons can increase your expansion revenue.

Watch the full episode

 

 

Zoom

What would a video conferencing product need to make you feel like distance and even a computer screen aren’t coming between you and a loved one or colleague? 

This is the central question that Zoom’s founder and CEO Eric Yuan daydreamed about during a much hated, 10-hour train ride he would take from where he attended university to go see his girlfriend, now wife. He would get so exhausted that he’d fall asleep standing—yea, did we mention he needed to stand the whole time? 

To make matters even worse, Yuan was only able to see his girlfriend twice per year, so it’s pretty understandable that he’d imagine a device where he could simply push a button and be able to see and talk to her, instantly.

Little did he know that these daydreams would lead to a multi-billion dollar company that not only took the world of business by storm, but also entered public consciousness and has even become a verb we use on a daily basis. 

 


Zoom's success

Zoom’s strength stems from Yuan’s vision, which was to create a product that would work equally well in a boardroom, a classroom, or even a kitchen anywhere in the world. And even though the video and conferencing market is one of the most crowded in the world, Zoom didn’t revolutionize any one thing to win the market. Instead, Zoom took all of the issues that other products had—big and small—and just fixed them with an insatiable focus on experience. 

Throw in a freemium pricing model where anyone can connect to a 40-minute meeting for free, and you have a recipe for a once-in-a-generation product that’s worth more than IBM, VMware, and the world’s seven largest airlines combined—that’s a lot of meetings. 

This growth hasn’t come without criticism though. Zoom didn’t anticipate certain use cases, and so privacy and security issues have become a thorn in Zoom’s side with barbs being thrown from security experts, lawmakers, and even the FBI. 

Zoom’s addressed all of these incidents and spun up a world-class security team to fix these and future flaws, but some believe this is the wedge to take on Zoom’s growth, especially from a security, enterprise-conscious foe like Microsoft and their Microsoft Teams product. 

Other critics note that many competitive products—both big and small—can simply draft off Zoom’s innovation and add more functionality to take on Zoom or at least make a cheaper, equivalent Zoom.

The question then becomes: Does Zoom have enough product chops to justify and hold on to their growth, especially in a market that’s only going to become more competitive? Does the calculus change when you realize video conferencing is becoming more commoditized and willingness to pay is dropping like a bad internet connection? It seems this market is Zoom’s to lose, but we’re going to answer these questions by collecting data from 10, 542 current and prospective Zoom customers. Keep reading for all the data and answers to these questions.

 

Zoomin'

There's some days where I'm "Zooming," like 15 times a day. And the beauty of what Zoom did is they basically took all of the annoying pieces, like the two dozen different annoying pieces of all of the other products and fixed them. 

I think that's a big thing that a lot of companies can take away from this, which is sometimes you don't have to be 10x better. A lot of people think, "Oh, if I can't make a five to 10x better product, it's just not going to work out." And I think what Zoom realized is that in some markets there isn't a 10x better product and therefore, why not just incrementally improve all of the things that make these other products not so great. And with a nice little freemium model, which we'll get into, you can just go ahead and beat the market.

But have they gotten too good at what they're doing? That's an interesting question, right? What if Zoom kind of niches down. It's interesting because you see this within certain markets where they're basically the all-in-one, then they'll commoditize. And I think the folks who win the all-in- one are typically the ones where it's such a utility and so commoditize, and they price based on that, where either the niches will then connect the data or connect certain aspects of the product into the rest of the workflow of the segment. What Zoom needs to be careful of, and where they might run into some problems, is that they could actually find that they're too general. All of a sudden there is a Zoom specific for sales people. There is a Zoom specific for webinars, which we've seen, you know, with mixed success. But now just video calling is finally  ubiquitous throughout the culture. And you can argue that it was ubiquitous before, but it really wasn't. But, let's get into the data.

 

Where does our data come from? 

Here at ProfitWell, our Price Intelligently software combines proprietary algorithms and methodologies with a team of pricing experts who think about this stuff more than anyone else to help companies optimize their monetization strategy. We do this by going out into the market and collecting data from current and prospective customers, having the ability to collect data from everyone, from a soccer mom or dad in the middle of Kansas, all the way to a fortune 500 CIO in South Africa. We then take that data and run it through our algorithms and analyze it in every direction to determine a company's ideal customer profiles, as well as which segments value, which features and which segments are willing to pay more, all in the spirit of determining how a company can use monetization for growth.

 

Zoom's pricing page

The freemium model

First up, freemium done right means providing value with the right triggers. And what I mean by that is when Zoom entered the market and started to grow heavily, there were a lot of free trials on the market. There were a few freemium offerings on the market, but none of them really gave potential users full access to the product. Zoom's big throttle was actually meeting length. So you couldn't go for more than 40 minutes, and eventually you're going to have to upgrade because everybody needs more than 40 minutes.

You need to think about freemium as like a premium ebook, where you're kind of opening up the top of the funnel and getting a lot of users in. And then if you give a full feature for free, which is what Zoom essentially did, and you're limiting some sort of throttle that really isn't that annoying until you're willing to pay. That's the perfect freemium model.

For example, Slack does this. The 10,000 data limit, in terms of the ability to search back 10,000 messages, that's not really annoying until you're about 20 people, probably 15. You're not just paying them $5 a month, you ended up paying them $150 to $200 a month right out of the gate. And I think Zoom does this beautifully, not only for the hundred participants, unlimited one-to-one meetings, all of these different things, but also when you upgrade, all of a sudden, it's based on the number of users that you have. And they pretty much kind of force you into where, yes, you can pay one-off for like $15 a month type users. But then when you get into real business features that you might be looking for, you have to buy a minimum of 10 seats.

 

Push pricing done right

Zoom shows us push pricing done, right. And as we've talked about a lot, there's this kind of theory when it comes to SaaS pricing in particular, where you can have push versus pull pricing, right? And again Slack is a really good example of using pull pricing right. They're not forcing you to upgrade, it's when you naturally want to upgrade and you're fine paying more, that you upgrade.

A different example of push pricing, one that I don't think is that great is actually Salesforce. They do push pricing where it's, "Hey, you might get the API in the lower tier, but you don't get any calls on the API until you're on the next year. So, you have to upgrade." But it's one of those things where they're able to do this because they're the behemoth in the market. The problem with push pricing is that oftentimes, you end up having users on that particular product that aren't using 50% of the features you're offering them, because there's just so many nickel-and- dime features, and they kind of chose where to put them.

Push pricing was really good in the 2000s and 2010s, because there just weren't as many features. Now there's a great deal of features out there. So you're seeing the rise of more pull pricing. What you'll notice is that even just on the structure of Zoom's pricing page, when you go to wanting some of these other features, you automatically have to get a minimum of 10 users. Now, normally we would think that was terrible. But what you'll notice in the actual data is that the willingness to pay for folks, is right on target when it comes to those particular features. As soon as they push you up into that tier that you're forced into, you want SSO, you want some branding. And so it doesn't feel like you're paying for things that you're not really using. Like the Salesforce situation, you end up just paying for things that you were naturally going to want anyway.

WTP - Willingness to Pay Per User 1 (0;00;05;18)-1

To illustrate this point further. When we look at this actual relative preference graph, comparing and contrasting what the relative preference for different features are, based on the number of users needed—those who need two to 10 users—their highest preferred feature is meetings over 40 minutes. Whereas, those who need more than a 100 users, there's a lot of dissonance, where they obviously do need more than 40 minutes. But all of the other features are then basically hovering around that indifference point. You can kind of see that same dissonance when you look at the two to 10 users. The dissonance is occurring for two different reasons. One, because the group of more than a hundred users, actually wants every feature—typical with the enterprise side. And two, the group of two to 10 users can't decide on which other feature they really, really want.

Pricing Preference 4 columns 4 categories 2 (0;00;03;02)-1

The long and short of it is that as those customers start to upgrade, they're willing to pay more. And they're more than willing to pay for those particular features, because those are the features that they're actually looking for. The big takeaway for you and your business is that you should be thinking through the segments of your customers and how they grow with the differentiated features that you have, not only from an add-on perspective, but also from a tiering perspective. Because if you have tiers where there's a lot of dissonance in where those features are, meaning they don't really want to upgrade for that feature, they don't want to be forced to upgrade for that feature. You run the risk of running into a situation where your users basically just aren't buying it. And all of a sudden you're going to create this pain when people want to upgrade, where they're not going to love to pay you more for the product, which is just a very old school way of thinking when it comes to monetizing software.

 

Home annuals

Next up, hammering home annuals is crucial to higher lifetime value (LTV) and lower churn—one hundred percent. If you look at Zoom's workflow, you can see how they inundate potential buyers with this upgrade to annual. And as you hit "buy now," it is the most highlighted center screen tier, where they're basically saying you can sign up for a monthly for $200 a month, or you can save $400 and get the annual plan. And that's totally intentional. People don't necessarily register percentages. Dollars typically have a bigger impact and really move the needle.

We looked at how often people would select an annual plan based on the type of offer that they were given. We found that when you're using X percentage off, so 18% off, 20% off, whatever it ends up being, it does work. In this data set, it's basically a median of about 11% of people will sign up for the annual plan. But when you change that to two months free or X number of months free, or a specific dollar amount off, all of a sudden that jumps to almost 50%, depending on how you're looking at it in terms of effectiveness or in terms of signup. In reality, what people should be doing is not only helping people upgrade to an annual at signup, but then make sure that in those first two to 10 months, that those customers are getting other offers to upgrade to annual.

WTP - Effectiveness of Different Annual Upgrades (0;00;07;09)-1

Sometimes when you're just starting the relationship, people aren't ready to go into an annual commitment. We consistently found those on annual plans typically churn at about a 30% lower the rate of those on monthly plans. So you want to make sure you're optimizing these annuals, both for lifetime value, as well as for lower churn. And this is something that Zoom does really, really well.

 

Add-ons

Add-ons will make or break B2B SaaS growth, one hundred percent. Zoom has a bunch of different add-ons—Zoom phone, Zoom rooms, um, the H323 room connector, which I have no idea what that is, but it sounds fascinating. It's another $50 per month per port.

Below is something called a value matrix. Here. We collected data from the group, comparing feature preferences and plotted those on the horizontal axis, more valued features on the right less valued on the left. We then collected willingness to pay for the overall product and plotted that based on their number one feature preference on the Y axis analyzing data in this manner allows us to determine which features are differentiable ad-ons core or commoditized for each segment.

Value Matrix of Feature Preference and Willingness to Pay 4 (0;00;07;05)-1

You need to really think about how you differentiate your features, either into bundling them within the product or making them an add-on. If they're not used by, let's say more than 40% of the users within a tier, you should be taking that feature out and ultimately, making sure that you're selling it to everyone. And to give you some data here, when you look at some of the pieces that Zoom has actually broken off in terms of add-ons, is that those particular features are not necessarily needed by everyone. If you're not into video webinars, you're not going to have video webinars software, right. But the people who do want that product, they're more than willing to pay for it. And I think it's a really strong illustration of just how powerful and how important making sure that you're understanding where the actual value in your features are, because too often, businesses are bundling too many features, when they should be taking them out and selling as add-ons within their product.

 


Pricing recap

 

  1. Freemium done right means providing value with the right triggers.
    It's an acquisition model, not a revenue model within your business. I'm a big proponent that every company in the world is going to have freemium in the next 10 years. So you need some way to get people into your funnel while lowering the activation energy to give you an email or to create an actual account, but you have to make sure that you're giving enough within that freemium tier that people want it. Providing value without cannibalizing revenue from your paid plan.
  2. Push pricing done right can do wondersWe saw with Zoom that push pricing isn't necessarily something that most companies should do, but Zoom dit it almost perfectly when it comes to their actual features. The features that they push you into are the ones that you're naturally going to want anyway. So it's a perfect kind of world of getting the benefits of pull pricing, meaning the user just naturally upgrades, but doing it in more pushy manner, which Zoom obviously has taken advantage of to get a ton of enterprise value.
  3. Add-ons will make or break B2B SaaS businessesZoom absolutely nails this. They have numerous add-ons and they do a great job at making them available to everyone.

If you want help with this type of pricing research for your company, feel free to email me at patrick@profitwell.com or rob@profitwell.com, and we'll make sure you get hooked up with the right people to make sure you're focused getting your monetization right. 

 


Who's up next?

Next week we're going to be talking about the big ecommerce juggernaut, Shopify, who has basically taken over the world, but they're doing some things wrong that could be really dangerous for them in the context of Amazon. So I'm excited to dig into that data and ultimately help them not get overtaken by Amazon. Don't miss it.

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This is a ProfitWell Recur production—the first media network dedicated entirely to the SaaS and subscription space. 

 
By Patrick Campbell

Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.

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