Zenefits New Take on the Freemium SaaS Model

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zenefitsWhen people talk about running their business as a SaaS (Software as a Service) model that usually means the software is hosted somewhere in the cloud and they charge customers on a monthly basis for those services. One of the first companies to jump on this business model was Salesforce.com which started as a customer relationship management (CRM) tool in 1999. This allowed customers to be more flexible and buy monthly access to the software without having to purchase a software license outright that might have a large upfront cost.

Then in 2006, the word “freemium” came into existence. It was first uttered on the blog of Fred Wilson, a noted venture capitalist with Union Square Ventures. From the freemium Wikipedia page:

Freemium is a pricing strategy by which a product or service (typically a digital offering or application such as software, media, games or web services) is provided free of charge, but money (premium) is charged for proprietary features, functionality, or virtual goods.

Dropbox is the poster child of this pricing strategy, they give you 2GB of free cloud storage but if you want more you have to pay for it.  This strategy has worked brilliantly for 1000’s of companies and continues to be the pricing model many startups follow.  From a consumer/enterprise standpoint it’s a slam dunk because you get to “try before you buy” and only when the company has proven its usefulness then you can hand over your hard earned money.

Enter 2013 and Zenefits. Since Zenefits is a business to business (B2B) offering they don’t get much mainstream media love, but they have taken the freemium SaaS model and completely blown it to bits. Zenefits is an online human resource offering which lets businesses manage their payroll and taxes, compliance, new employee onboarding, vacation tracking, time and attendance, benefits administration, stock options tracking and much more.

What makes Zenefits business model so different is that all of the features are free whether you have 5 or 1,000s of employees. In a typical freemium model they would have given away their service for free for the first 20 employees then start charging after that. So how does Zenefits makes money? They make money from a single feature – insurance. If you decide you want Zenefits to help you find and manage your insurance plans then they take a commission from that. In essence, you could use all the features (minus insurance) and never have to pay a nickel to Zenefits.

Evolution of software pricing models:
Phase 1 – Upfront site license cost and software installed on local computers (Microsoft Office)
Phase 2 – SaaS model that charges for incremental use (Salesforce)
Phase 3 – SaaS freemium model, give customers a free taste of the product (Dropbox)
Phase 4 – SaaS model that is essentially free to use without any limitations except that “one thing” (Zenefits)

I see a whole host of businesses deploying a similar pricing strategy to Zenefits. The key is to figure out that “one thing” you want to monetize which has enough margin in it. It’s the same strategy that open source companies have been using, they give away the software (like Red Hat) and then charge for that “one thing” which in this case is the service and support for Red Hat software.

Another example could be in the medical field where a doctor needs a tool for his office staff to on board new patients, book appointments, bill patients, patient records, etc…  Yes, there are companies like ZocDoc and Practo that do that today with a traditional SaaS model that charge for incremental usage. But in this new model the platform would give away everything for free and monetize via the diagnostic laboratory services (i.e. blood work) that it offers. In essense, the company is really a diagnostic lab (technically known as a phlebotomy laboratory) that just happens to have a free CRM tool for the medical office. Which is really what Zenefits has done, they are an insurance broker that just happens to have an amazing set of human resource tools that companies can use.

Many people argue that when you give away something for free that no one values it…I call bullshit on that. Look no further then the current valuations of Zenefits and decide for yourself. The following quote from Chris Dixon of VC firm Andreessen Horowitz resonates with this new SaaS model:

Come for the tool, stay for the network

1 Year of Modi

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narendra-modi-one-year-LIt’s been a year since Narendra Modi was selected as the Prime Minister by his party – the BJP. During the election campaign his slogan was:

Achhe din aane waale hain

Which translates into “good days are coming”. Well it’s been 1 year or 20% of his 5 year term and I would say most people feel the good days still have not arrived.

During the run up to the election, I kept on comparing Modi to Obama in that both countries were betting that a single charismatic speaker could turn around the fortunes of a country. That comparison of Modi vs. Obama did not go down well with most supporters of Modi. They kept on referring to his 13+ years as Chief Minister of the state of Gujarat and turning it into an economic powerhouse. Obama’s campaign slogan was “Hope” and everyone jumped on the bandwagon (me included) but when I look back at what he has achieved it’s pretty disappointing. It’s partisan politics as usual which means nothing is getting done.

Back in India, Modi is facing the same issue with partisan politics and that logjam is stifling the country. Two big bills Modi and the BJP are trying to pass are the Land Acquisition bill and the GST (Goods and Services Tax) bill. Every week that passes without resolution is another delay that the country cannot afford. The reasons for the delay are very much related to money. With the passage of the GST bill, the state governments no longer collect the money directly but get the money from the central government. It’s a bit like working and getting your own paycheck vs working and the money getting deposited into your parents account who in turn give you an allowance. As you can imagine the state governments that are not under the BJP government are not to happy about this and pretty much stopping every piece of legislation.

Of course, when you speak to a BJP party loyalist they will tell you the previous UPA-led government spent the last 10 years trashing the country and that takes time to fix. I do buy that argument. It’s probably like crashing your car and then expecting the repair shop to fix the car in a day.

However, what is frustrating are some of the proposed changes that have been leaked to the press. One such proposed change is that any international trip must be documented in your tax return. Yes, every time you travel you must document every expenditure down to a taxi receipt because they want to know where the money came from. I can only imagine the conversation that ensued when the idea was hatched:

Babu 1: Let’s track everyone’s international travel

Babu 2: Okay, when they book an airline ticket we can ask them for their PAN card number

Babu 1: That means we have to work with all those airlines to add another field to the booking engine, that seems like a long process

Babu 2: Okay, then why don’t we add a line in the ITR (Income Tax Return) form

Babu 1: Done.

Babu 2: Of course that means a lot more paperwork for the taxpayer, but who cares

As expected, the government has still has not decided what they plan on doing about documenting international travel even though tax returns are due at the end of July…so India.

The only people that are celebrating the good days in India are the ones that are benefiting from the VC gravy-train of money – startups, recruiters, Android developers, iOS developers, marketing firms and advertising outlets. Otherwise everyone else is still waiting for the good days to come.

The App Revolution

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Mobile-app-revolution-IndaiAre we in a bubble? Yes we are, planet Earth depends on the atmosphere which is a bubble of gases and protects us from meteorites and warms the Earth’s surface.

Okay, I’m assuming if you are in the technology sector you might be hearing that bubble question every other day. I like everyone else have no idea if we are in a technology bubble and if and when it will pop. When the dot com bubble popped what was left was a lot of broken dreams. In addition, a lot of infrastructure (aka internet plumbing) in the form of underutilized fiber cables, carrier class data switches, etc…

What is a more interesting question is what is being built with all this venture capital (VC) money that is being thrown around these days. If the music stopped today what would we be left with?

1. Two formidable mobile phone platforms – Android and iOS. Android has the market share while iOS has the revenue share. When you look at the first phones from each platform, the delta of awesomeness between an Android phone and an iOS phone was very high in favor of iOS. But, as the years progressed Android really closed the gap and I would say the delta between the two platforms is fairly slim now when you look at mobile phone players like Xiaomi, OnePlus and Yu Televentures from India.

2. Sharing economy. The ability to unlock the value from fixed assets or even people has been inspiring to see. People that are short on cash and have a spare bedroom, can rent that room on Airbnb and generate some revenue (granted this has been happening for years but it was very informal). If you are a hair stylist that only works 3 days a week in a salon, you could potentially “freelance” your skills for a couple days of the week to augment your income.

3. Apps. What can I say, if I hear one more person say “Have, I have this great app idea…” I’m going to puke. All jokes aside, apps have changed the way we interact with technology. Watching a little child use a phone or tablet and move around the interface with ease is something else…that’s what technology is all about. Sitting at a desktop and using a mouse to move something on screen now just seems old school and painful.

In India, the one area that has really benefitted from the flow of VC money has been logistics. Before, logistics was a pain in the ass and getting things from point A to point B was a challenge. But with the rise of new logistics players who can track packages, send an SMS status or allow you to call the delivery agent is great. So if the party stops today, India will also have a much better logistics infrastructure in place.

As Mark Twain says:

History doesn’t repeat itself, but it does rhyme

A great blog post by venture capitalist Brad Feld talking about the above quote.

India’s Daughter

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bbc-indias-daughter

The BBC’s documentary “India’s Daughter” is about Jyoti Singh (aka Nirbhaya) who was brutally ganged raped by 6 monsters in Delhi in December 2012. The rape galvanized the country and led to several days of protests in Delhi and other cities in India. As usual, a lot of candles were lit but nothing really changed.

This is the first documentary where I had to stop watching for a while because my anger was rising with each passing second. Anger at the culprits, anger at the system, anger at the traditional Indian culture and anger at the defense attorneys. I still for the life of me can’t figure out the logic behind blaming a women for getting raped.

Before the documentary aired in the UK, some of the quotes from the main prisoner who was interviewed, Mukesh Singh, were splashed all over the media. However, while watching the documentary I was more shocked at the words coming from the two defense attorneys. Sadly, their views on women and Indian society is what most people in the outskirts of India think as well. They believe women belong in the home to cook and clean.

Fortunately, Jyoti’s parents were progressive in their thinking and allowed their daughter to go to school and get a job in the medical system. That’s an impressive feat considering that her parents are poor and had to sell some property to pay for her education.

Anyways, go watch the documentary. You can download it from the PirateBay or kickass torrents.

Automotive Disruption Just Around the Corner

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tesla-disruptWhen did the world wake up and take notice of the automotive industry?

5 years ago General Motors (GM) filed for chapter 11 bankruptcy and no one seemed to care, today it’s a completely different story. GM recently announced one of their best quarters ever and has about $25 billion in the bank, yes that’s a “B” for billion. Now everyone is talking about the automotive industry, so much so that the press is speculating that Apple is working on an electric vehicle. The current automotive trends people are talking about are highlighted below and some of the companies involved:

– Self-driving cars (Google X)
– Electric cars (Tesla)
– Ride-sharing (Uber)
– 3D printed cars (Local Motors)

I assume the sudden interest in the car is because it’s such a large industry and when you talk about disruption this is one market that needs it. However, let’s rewind a bit.

The automotive age really kicked off with the introduction of the Ford Model T in 1908 as an affordable car for the middle class. It had 4 wheels and an internal combustion engine. You know what the car still 4 wheels and an internal combustion and that’s the problem. Yes, cars from 1908 look very different from the 2014 models but at the heart of the car is still the fossil fuel gulping internal combustion engine.

The automotive industry’s innovation for the past 10 years has been selling vehicles with more and more horsepower. I can’t for the life of me understand why you need a 400+ horsepower SUV to lug people around. I love cars, but when I speak to most normal humans they view their cars as a way to get from point a to point b. The industry really should have spent their R&D budget on engineering cars that would go further on a tank of gas/petrol instead of focusing on how fast it could drain that tank.

Self-driving cars and ride-sharing services like Uber show that people don’t want to drive. If people could afford a driver/chauffeur they would but most can’t and hence these other options are flourishing.

The aura of the electric car has been elevated 100x with Tesla in the game. Previously, electrics cars were ugly looking and something only a tree hugger could love. But, Tesla changed the game and is quickly moving towards its eventual goal of having an electric 4 door car costing around $40,000. In addition, there are many people working on the ultimate technology that would detach the car from the fossil fuel grid…solar power. Fisker Automotive which recently was bought out of bankruptcy by a Chinese company had a solar panel roof on their cars to power the accessories in the car. As solar cell technology gets more efficient it truly will allow the car to cut the cord to the fossil fuel grid.

For me the most innovative area is 3D printing, imagine you get into an accident and you take your car to the bodyshop to get it fixed. Instead of ordering the fender and having it delivered the next day, they print the rear-quarter panel overnight. Back in the day when GM launched Saturn one of the selling points of the car were the dent resistant body panels. The plastic pellets used to create the body panels were sold by GE Plastics (now called SABIC). In a country like India, all body panels should be made out of these plastic pellets since people get their doors dented and dinged almost on a daily basis. 3D printing of body panels is one thing but Local Motors recently unveiled their fully 3D printed vehicle. The implications of the open source project are far and wide, people can take the Local Motors designs and improve upon it. Who would have guessed that open source would hit the automotive industry.

It’s exciting times ahead for the automotive industry, the question is whether the big automotive companies can quickly capture these trends or continue the status quo. It’s the typical innovator’s dilemma, get with the times or get left behind.

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