This episode might reference ProfitWell and ProfitWell Recur. Some information may be out of date.
XERO
Xero, a New Zealand accounting software company, was founded in 2006 by Rod Drury, who started his career as an auditor and then founded his own consulting and development firm. He realized that traditional accounting software was terrible for business owners, so he set out to build something better. Xero's success lies in its seamless, beautiful design that takes into account every functionality and the end user's purpose. With over two million subscribers worldwide and a valuation of $8 billion, Xero is one of the fastest-growing SaaS companies in the world, used by 70% of all businesses in the US. Drury stepped down as CEO in 2018, and Steve Vamos took over with over 30 years of experience in technology and digital media, including IBM, Apple, and Microsoft. Drury still serves as a non-executive director on the Xero board and focuses on creating new products for the platform to continue its growth.
Critics argue that Xero's growth cannot be sustained by simply acquiring new users, and that the company needs to find a way to increase revenue per user. Competitors like Quickbooks are improving their design and functionality, while new companies are further commoditizing the accounting software market. This makes it difficult for Xero to continue growing as quickly as they need to.
The question becomes: How can Xero use its fundamentals of focusing on the customer and position as innovator in the market, to go beyond merely being better than the rest of the market, and into a position of dominance for generations to come? Xero can’t go the way of Quickbooks, so we’re going to answer these questions by collecting data from 10,542 current and prospective Xero customers. We’ll reveal all the data and answers to these questions, so keep reading.
Xero's pricing page
Simplicity
The pricing page is extremely straightforward. It's easy to choose the right plan with options like Early, Growing, and Established. The product is well-designed, but it's not in your face. The simplicity comes from the choices they made. Keep in mind that the pricing page is not the beginning of the journey. If someone signs up for Xero and gets confused on the pricing page, they can explore and find the information they need.
Then it states that all plans include all of these features, and then there's these cool add-ons if you're in the big plan. It continues with sections to answer more questions or help you get started. There's this blooming effect as you scroll down the page, which I think is really powerful.
And if I come from all these different pages, I have enough context that maybe I just want to jump in. And I think too often, people want to go all out, when I think simple works really well. And then you need to support that simplicity in the right way. So I'm sure that Xero knows exactly where everyone's coming from to this page, or at least where the most common things are. They've designed it to take advantage of that traffic.
Data and analysis
Brand and design drives higher willingness to pay
Brand and design drive higher willingness to pay. Studies show that brand design impacts willingness to pay. Anthropological studies were conducted where people were asked questions about the design of a product, pricing page, or brand. Scores were measured and put on an affinity level from negative two up to two. Willingness to pay was then asked and determined that having a higher affinity for design increases willingness to pay.
Positive affinity towards a company's design can increase willingness to pay for a product by almost 25%. However, if the affinity towards the design is not good, or if it is negative, the willingness to pay only drops by 10%. This loss can still be recovered through word of mouth and other factors that contribute to the product's value.
Good design can lead to winning, which is becoming increasingly important in today's market. Five or six years ago, design was not as valued, but now it serves as a proxy for value, especially with the abundance of competitors. Consider the success of Notion, whose minimalist and simple design has gravitated users towards their product.
We conducted a study on brand, which is now a crucial aspect of business. Unfortunately, not enough people have a brand strategy, which can impact their brand perception positively or negatively. Our study found that brand perception can increase by 20-30% or decrease by the same amount. This is particularly challenging for businesses targeting younger buyers as their identity is often tied to the products or services they use. Therefore, having a good brand perception is essential for businesses to succeed.
And we saw this with much of the different, crazy things that happened in 2020. The different movements that were happening—all of a sudden, people were looking for brands to signal in one direction or another, and other people didn't like the signals. So it puts brands in an interesting situation where they have to really manage the brands a lot more than they used to. Before it was just accounting software, but now it's whether people want to associate with the brand. Does the brand help small businesses, good design, and everything in between.
Value Matrix
You're about to see something called a value matrix. 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 add-ons, core, or commoditized for each segment.
Don't bundle what should be an add on
It's super important to understand both, the relative willingness to pay, and the relative preference of these features.
Here, what is really fascinating is that both, expense tracking and project tracking, they weren't really valued features overall compared to the other features. The people who cared about them were willing to pay more. In that context, I think Xero is losing an opportunity by bundling these together.
We've discussed this previously - some add-ons are universally useful and should be offered to everyone regardless of company size or maturity, while others may not align with upgraded packaging. Offer universal add-ons and allow customers to add them onto their subscription.
Your business may be selling features that are used or valued by less than 40% of the people within a tier. Consider pulling those features out and selling them as an add-on. You could differentiate and take advantage of that willingness to pay by giving it away for free to the people who are in that tier for the next year or so.
Add-ons are the name of the game in mass, but fragmented, user bases
When dealing with a diverse user base of millions, it's important to recognize that there are many different types of users. Simply selling them the basic package is not enough. Instead, you should provide various add-ons to increase the average revenue per user over time.
This is a modern way of thinking in the B2B world. Xero is following an old way of thinking by offering tiers and bundling add-ons like "advanced reporting project time," "cost tracking," "expense tracking," and "multi-currency." They only offer "payroll" and other partner products as add-ons. This is a missed opportunity.
Now, of course you have to balance this with volume. And they might be using these as, "Hey, we bundle it in there for, you should buy us over using something else." But I think it's a little bit of a false equivalency because they're now the behemoth in the market. They should start taking advantage of that in a good way—not only adding value for users, but also making sure that those users are getting enough of what they need.
In conclusion, Xero's success in the accounting software market has largely been driven by its focus on the customer and innovative design. However, as the market becomes increasingly commoditized, Xero will need to find ways to increase revenue per user and maintain its position as a market leader. Our data analysis suggests that offering add-ons and unbundling certain features could be one way to achieve this. Additionally, improving brand perception and design can lead to higher willingness to pay and drive customer loyalty. As Xero continues to navigate the challenges of a rapidly evolving market, it will be essential for the company to stay true to its fundamentals while also adapting to changing customer needs and preferences.
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