A Tale of Two Strategies

KashFlow went public the other day proudly boasting that it had reached the 2500 paying customer mark. This figure puts them at roughly USD700k revenue and, according to founder Duane Jackson, they’re already at breakeven point and meeting the costs of their ten person organisation. The KashFlow strategy is very much one of local immersion, as Jackson says;

I’ve consciously taken the path of having a bigger slice of a smaller pie…We’re focussing purely on capitalising on our dominant position in the UK market at the moment. It’s a big enough market to keep us busy for the time being

In the current global economic conditions, the Directors are focused on ensuring the careful management of the Company’s costs but recognise that to build international sales momentum there must be a concurrent focus on business development and the establishment of marketing partnerships in the geographies where the Company operates

The comparison between Xero and KashFlow raises some questions for me;

Time to Scale

As AccMan points out in his post, KashFlow launched its product in mid 2005. They’ve taken then close to four years to build to the level they’re at now. Xero on the other hand has had 18 months out of the blocks and has achieved similar customer numbers and, more importantly, put in place some strong vertical and channel relationships which should lubricate the on-ramp for subsequent customers.

There has been some muscle flexing and marketing spin of late about who has the biggest share of the SaaS accounting market in the UK but as Dennis points out, when customer numbers are in the single thousands, the net impact of the SaaS players overall is negligible. Let me reiterate – the figures are tiny. The fact that no one has cracked the SaaS market, looked at concurrently with the massive numbers of small and medium business that exist, shows that the opportunity is still there for the taking. The question that really needs to be answered is how fast will the SaaS market grow, and will the current crop of SaaS providers be able to scale their operations sufficiently quickly to provide for the rapid growth in demand that IDC’s recently published report is predicting.

And this is where another interesting comparison between KashFlow and Xero comes in. KashFlow has gone down the path of bootstrapping and relying on organic growth. While that is a safe strategy (after all KashFlow is already at breakeven point while Xero is burning cash fast) it’s not a strategy that puts in place a structure for rapid growth. That very same burn rate that some would see as risky for Xero gives them the resource to do some strong vertical sales work and also put in place some exciting benefits for channel partners.

Given the fact that KashFlow is already at breakeven while Xero is burning cash, the excellent analysis of how many customers Xero actually needs to justify their valuation is an interesting read (notwithstanding that it is somewhat out of date).

The cost to scale

Now that KashFlow has broken even, in theory every additional customer should go straight to the bottom line. Until breakeven points much revenue goes to paying for the cost of development, thereafter the marginal cost of scaling is minimal. BUT… this only works if the product is inherently designed for scale – we’ve all see what happens when a lightweight application scales wildly, the amount of re-architecting that Twitter had to do last year would seem to be significant.

In a recent podcast, KashFlow described their move from a pair of self-owned physical servers to outsourced, Rackspace provided ones. I have no knowledge as to how much capacity their 2500 leaves on those servers, but clearly at these small numbers, the addition of physical servers happens in steps and clearly the first customer on any additional server is an exceptionally expensive customer to have.

Clearly the recent issues around data loss from Cloud solutions (more and morer) highlight the fact that customers should be questioning their vendors – especially when we’re talking about financial data, arguably the most sensitive of all –  Servers, monitoring, failovers, 24/7 support expectations, self service knowledgebases, backups, client side backups, fraud, IP restrictions, GEO IP mods, licensing, version control and the like are foreign terms to those of us without an architecture background but they’re probably terms we should get to know intimately.

Geographic spread

Dennis gives some interesting figures for FreshBooks who have roughly ten times the numbers of users now as there were three years ago and, more interestingly, close to 50000 users in the UK alone. Now while many of those users may in fact be using the product for free, thus muddying the ability to perform a direct comparison, both the rapid growth of FreshBooks and their wide geographic spread serves as a model for newer entrants.

While KashFlow has (understandably given its lack of spare cash) decided on a local market strategy, Xero has launched an international version and is rapidly moving towards being a global player. The question therefore is which is a more viable strategy – to try and gain a large slice of a small(ish) pie, or to attempt to gain a share of a much large pie indeed.

Is there room in the sandpit for everyone?

Another question is whether SaaS will follow the trend of desktop accounting software and have a few massive vendors being preeminent. The triumvirate of Intuit, Sage and MYOB supply the vast majority of accounting software so one would be forgiven for thinking that a similar number of players will dominate the SaaS space. SaaS however, in comparison to traditional installed applications, enables much more tailored solutions, rapid development and deployment times and ready integration between different applications. As such there is room for lots of different players under a SaaS environment – both the organic growth, general market and regional specific solutions such as KashFlow and the high growth, market tailored, verticalised offerings such as Xero.

It has to be said however that targeting the general market makes it difficult to convince users to replace the incumbent products. Unless there is a compelling reason to forego your existing provider – and tailored vertical offerings or some other “value add” provide an incentive to do so – customers in what is after-all an important but non-core business area are unlikely to go out on a limb for no real reason.

Fast scale requires profile

The average small business doesn’t have the time or inclination to verse themselves on the minutiae of accounting software. As such they make their decision based on a small number of sources – friends and family, advisors and commentators. A small business that actively searches, for example, for SaaS accounting applications will find independent commentary from a very small pool of analysts (you can count them on the fingers of one hand) – it is for this reason that targeting a large market, ramping up inbound marketing and developing a powerful brand (check *3 to FreshBooks there) grows scale fast. Thereafter distinct vertical plays allow a vendor to mop up a high proportion of discrete verticals.

Summary

There’s no black and white answers I’m afraid – neither Xero nor KashFlow are flawed in their go-to-market strategies, it’s more a case of needing to be realistic as to the end result of any given strategy. At the risk of mixing metaphors, a sow’s ear is a good and useful thing; on a pig. But you’re mistaken if you think it’ll turn into a silk purse. Similarly those with champagne tastes better have the pockets to support it.

And a final last word to a friendly SaaS vendor CEO who shall remain anonymous;