The ‘middle market’ and Zoho/ZohoOne
I covered ERP vendor, Zoho, their platform and the ZohoOne suite in detail late last year (links below). The company continues to grow (significantly) and their customers seem to be loving them, too. One part of the narrative in recent years involves their move into the mid-market. Here are some thoughts on that.
The application software space is a trifurcated market. There are solutions for small businesses, mid-market firms and large enterprises. And, of course, there are vendors that want to dominate all three spaces. The reality is that this objective can be extremely difficult to complete.
It appears that the DNA within a product and a vendor can dictate how well and how quickly a particular product can scale up or down market. Marketing messages aside, this is often a material challenge for software firms. To move up or down market may require creation of all-new products/product lines, a different go-to-market approach, new contracting terms, different support methods and much more.
Let’s take a peek at this vendor challenge and what can happen to customers that are caught up in it. Specifics around Zoho’s products and customer feedback at their recent analyst day are also included below.
Scaling challenges – going down market
If you have an enterprise-class software product and want to go down market, you can face some substantial challenges. For example:
- Can you simplify the buying process? A vendor that is used to spending a half-million dollars pursuing a large enterprise customer will find it unprofitable to use that same sales approach on smaller firms. One firm that did this found it easier to acquire a mid-market vendor with a similar solution and learn from it. The large vendor’s sales professionals closed 1-4 deals annually while the mid-market sales people closed 20-50 deals annually. The mid-market vendor did most of its product demonstrations virtually. They had simplified contracts and far less ‘friction’ in the sales process. One telling thing, if a solution can’t be bought via a corporate credit card, it may be too complex for a mid-market or smaller firm to buy.
- Do you need to remove some product functionality? Enterprises can have highly complex processes with many levels of approvals, global regulatory requirements and more. Mid-market firms may not. Enterprises may need piles and piles of additional functionally to account for dozens of languages, 100+ currencies, country-specific compliance and regulatory needs and more but a mid-market firm may need very little of this. Smaller buyers may find an enterprise solution to be overkill while an enterprise customer may find a mid-market solution to be underpowered.
- Should you make the implementation more turnkey? Mid-market buyers often possess champagne tastes, but beer budgets. A mid-market solution should arrive with best practices and processes already pre-configured. That solution should arrive in a pre-instantiated cloud environment so that the customer doesn’t have to wait for new computer hardware be acquired and the application software to be installed. If an enterprise solution takes months or years to implement, could the mid-market solution be installed in days or weeks?
- Can you eliminate the need to have systems integrators drive the implementation? Hiring an integrator may be a cost these buyers can’t afford.
- Can you pre-supply the most likely third-party integrations that most mid-market customers will need? Mid-market firms will often use different third-party apps than those of a large enterprise. They will use different office productivity, CRM, back office and other applications. Creating and maintaining integrations to all of these systems can be costly. Anything a vendor can do to make this less expensive is a godsend to smaller firms.
Whether a vendor is going from the large enterprise to mid-market or mid-market to small business market segments, everything from product functionality, sales processes, marketing messages, customer pastoral care and more must be rethought and reimagined.
Scaling challenges – going up market
If you have a down market software product and want to go up market, you can face some expensive and complex challenges, too. Here are some of those:
- Add in functionality that wasn’t part of the original data model – Ouch! This one is tough. It’s hard to retrofit necessary functionality (e.g., ASC 606 revenue recognition or ESG reporting) into applications that never captured, validated, processed, reported or stored the information in the first place. You might find out your accounting system’s chart of accounts is too limited, too small, etc. to hold all the new data types, fields and more that you’ll need.
- Close critical information and IP (intellectual property) gaps - Worse, some needed capabilities may require knowledge a smaller vendor doesn’t possess (e.g., would a U.S.-based vendor know what sales/use/PST/GST tax requirements exist in other countries?). A smaller vendor may have to research these matters or contract with a third-party to provide this information.
- Cultivate a different kind of implementation and software partner network that can serve these new, bigger customers – Bigger and/or more complex customers need firms with more geographic coverage, multiple capabilities (e.g., systems implementation, change management and supply chain expertise). Smaller implementers may not be able to support projects that span continents, require people with tax expertise in these other locations, etc.
- Utilize more advanced technologies just to have a competitive solution – If your small business solution didn’t take advantage of advanced tech like machine learning, big data powered analytics, self-driving process automation, etc. then it may be behind competitively in the larger enterprise market. Larger firms automated their processes decades ago. They expect a solution provider to offer so much more.
The most successful vendors that upscale their solutions are the ones that planned for this eventuality and also acted with an eye towards convergence. Convergence is the conscious act of predicting what new technologies (e.g., quantum computing) would be coming into their own in the near to mid-term timeframe and designing one’s solution to be ready to implement this capability fast when that window of opportunity appears.
Likewise, the smartest upscalers leave room on input screens to accept new functional fields that future, bigger customers would want. They create expansive data models with future needs in mind. In doing so, these vendors could migrate existing customers to new capabilities without needing to rebuild databases, force disruptive upgrades on customers or leave long-time customers frozen on older, obsolete releases.
How well have vendors done in scaling up/down?
It has been a mixed bag of results. Some vendors:
- Designed their product over 50 years ago. These old products operated in a different time, with computer systems of extraordinary low capability, storage, memory and throughput. These vendors made design decisions that optimized the performance of scarce CPU and disk storage and rarely reserved anything for the future. Even a field as banal as a MM/DD/YYYY date field was often truncated or shortened to packed Julian format to save two bytes of storage. These solution vendors did not build for today’s or tomorrow’s world and their solutions did not scale.
- Have tried to make a new version of their legacy solution but instead spawned dozens of incremental upgrades. This resulted in creating an expensive death by a thousand cuts world for their customers. Readers have certainly seen old-school vendors create new versions of their products where the first version has a new, unified/consistent UX. That’s followed with a new version where the DBMS has been changed out. Then, the vendor wants to swap out other tech stack or platform components. Oh, and maybe the vendor needs to add a number of new microservices and disable older ones that weren’t cloud-friendly. And, of course, you’ll see another version that provides single-tenant or hosted cloud support for the product only to be eventually replaced or supplemented with a multi-tenant version, too. This ‘strategy’ is extraordinarily expensive, tiresome, risky and unnecessary.
- Tried to create a special version of their legacy product line that utilizes some new advanced technology or architecture while retaining a subset of the legacy product’s functionality. Surprisingly, these new solutions haven’t done all that well in the market as the vendor is still so addicted to keeping its legacy customers on legacy products. Legacy software is also what the sales team is used to selling and its where the biggest commissions lie. No wonder the new solution never gets much traction.
- Have a single brand and market segmentation and can’t get buyers to accept them as anything else. If a vendor is known as a ‘starter software’ solution provider, it’s hard to get mid-market or larger customers to accept them as something else.
- The corollary to this is that some vendors can’t change to be a multi-segment/multi-product player. Here is where you see if leopards are able to lose their spots. Sadly, some of these vendors don’t realize that their own internal policies, leaders, cost structures, R&D methods, commission structures, etc. were created or optimized for one kind of software vendor and they don’t work for a different kind.
ZohoOne and Zoho’s mid-market status
I did a detailed background piece on Zoho’s two offerings last Fall. I noted:
Zoho has two main product lines: Zoho for small businesses and modest functionality needs, and, Zoho One which is targeted for firms with more complex operations, accounting requirements, etc. Zoho One has been growing substantially since the pandemic broke (i.e., 60% growth year over year).
Since its release in 2017, Zoho One has won over 40,000 organizations as customers. Marketed as a ‘business operating system’, Zoho One customers have access to approximately 50 applications with most firms using about 21 of them. The application coverage is quite broad with solutions in many back office (e.g., Finance/Accounting, HR), CRM, online commerce, and other functions. Interestingly, Zoho has a number of very solid collaboration and workforce productivity applications as part of its suites.
That article actually went into a lot of depth on Zoho One and the company’s move to the mid-market.
We’ve actually known of Zoho’s plans to move their very large application suite upmarket for the last several years. In September 2019, colleague Phil Wainwright wrote:
Today's announcements include much to support Zoho's push into the mid-market space, with a new central administration panel, the new integration and workflow capabilities, and the launch of new premium support and implementation services for larger businesses. To cater for buyers that want to implement Zoho One in just part of their business, it has introduced a new $75 per-user pricing option in addition to the existing company-wide $30 per employee.
Zoho describes its flagship Zoho One bundle as "the operating system for businesses." Targeting small and midsize businesses — with typically a few dozen users up to a few thousand — it covers most common business needs across functions including sales and marketing, finance, HR and operations, all on a unified technology platform with built-in search, messaging, AI and other services.
A year earlier (2018) Phil also wrote this:
Zoho is now pondering how to expand its presence in the mid-market and enterprise sectors. The company is emboldened by its ability to sign up customers such as the 20,000-user IIFL, an Indian financial services company, or 15,000-user The Warehouse Group, New Zealand's largest retail group. There's a significant footprint in North America too, which accounts for 40% of Zoho One customers, including resin manufacturer Purolite and solar power installer Apex Solar. But it's a different type of sale from the small business market, admits Vegesna:
"For something like Zoho One, the mid-market is a great market, so we're focusing on that. For small business, it's a no-brainer. For enterprises, selling Zoho One directly is tough. But we see it as a phased sale. Larger customers start with one or two apps — we're seeing Zoho One as an upgrade play for larger enterprises."
Zoho isn't interested in building up a big enterprise sales team — its founder and CEO Sridhar Vembu in the past has criticized Salesforce in particular for this approach. However one angle that may give Zoho an in is that its sister company, ManagedEngine, already has 180,000 customers and an established relationship with enterprise IT departments. Vegesna says that the company has started reaching out through that channel to strike up conversations about Zoho One.”-
If you’d like to read more about product specifics, here are my suggestions:
- https://diginomica.com/zoho-the-consummate-bootstrapper August 2016 (a good origin story)
- https://diginomica.com/zoho-focus-edges-and-obstacles-zoho-sneaks-erp-and-crm-players August 2019 (Jon Reed)
- https://diginomica.com/business-operating-system-how-zohos-stacks 2021 October 2021 (my big piece on ZohoOne)
- https://diginomica.com/zohoday-2022-does-technology-vendor-culture-matter July 2022 (Phil’s recent culture piece)
- Also, check out Thomas Wieberneit’s piece on the analyst event itself http://www.epikonic.com/dont-mess-with-zoho-a-zohoday-2022-recap/
Today, Zoho has a number of assets and capabilities to use to fulfill its mid-market aspirations. They possess:
- Thousands of employees
- Hundreds of thousands of users and the cash these generate
- Global operations, data centers, etc.
- A consistent and modern technology stack
- A large number of advanced technologies (e.g., AI/ML) that have already been added to many applications
- Growing capital from profitable operations
Zoho even has a partnership with global IT consultancy Tata Consultancy Services (TCS) to help large enterprises implement Zoho solutions.
What Zoho needs most of all to achieve great mid-market chops is time. It needs time to round out and fortify several of its applications. One example of this is its Payroll module. While this application has had wide acceptance in India, its US payroll functionality currently only handles California tax filings.
Some functions/applications are already very mature for mid-market and large enterprises. Zoho’s CRM and related customer-facing and marketing apps are some of Zoho’s oldest apps. The development team associated with these apps has had many years to incorporate many upmarket capabilities and to embed new advanced technologies (e.g., Big Data, search, etc.).
In contrast, some newer applications are still adding new core functionality and some advanced technology capabilities. It will take time to get all of these applications up to the same level of functional sophistication and technical capability.
One senior Zoho executive told me this week that if the current mid-market functionality were classified as a version 1.0, then the version 2.0 that will appear in 1-2 years will represent a marked improvement.
In the software industry, there are couple of schools of thought re: the development and marketing of products. In one camp is what I call the Ernest & Julio Gallo school of software where a vendor doesn’t ‘release a product before its time’. This solution may spend extra years getting all of the needed functionality, compliance, regulatory, process and technical capabilities baked in, tested and in full working order. On the other extreme are vendors in the ‘if we can name it, we’ll sell it and we’ll fix the bugs after we get 98% market share’. Thankfully, there aren’t that many vendors in the latter category.
Zoho, in my opinion, rests between these dimensions, as do many other vendors. They create a new product with basic or core capabilities and assess how buyers are reacting to it. New capabilities are added as the feedback warrants it.
Don’t expect to see Zoho materially slow down or halt development in some of its more mature apps. At this week’s analyst briefing we saw several (NDA) slides showing new potential applications or application functionality that can be powered by AI/ML. Many of those requirements will likely go to both newer and more mature apps. Also, given the way Zoho’s development work is organized by functional teams (e.g., Books (for accounting apps)) and the continuity within each and the independence of these teams from other teams, customers should expect a continuing wave of innovations from each major product line and application within.
No upper limits or functional challenges
I posed a question to three of Zoho’s larger customers: Have you encountered any limitations in functionality with the Zoho apps given your scale? None of them reported any. One panelist pointed out that they use over 20 of the Zoho products and are not encountering any functional or technical issues.
I really wanted to push on that point but the setting (a keynote Q&A) didn’t really permit this. If I could have pursued this point further, I would have wanted to know if the customer cherry-picked which apps it got from Zoho and which ones came from other vendors. Later, I learned some ZohoOne customers were also using SAP ERP software for some operational systems. Another customer used Zendesk for some functions.
Products from different vendors have different strengths and weaknesses. You also don’t see two different applications possessing identical functional capabilities either. Moreover, a customer might prefer one solution now and pick something different a few years later. But, if a software buyer believes an application within a software suite isn’t up to their needs, they don’t buy it.
Why is this important? Maybe the reason these Zoho customers weren’t reporting any limitations could be that they didn’t buy or use the applications that they did not think were going to be a good or long-term fit for them. I guess what I’m saying is that asking customers if the product works well for them is actually a selection bias problem. I really need to find the prospective buyers who didn’t choose Zoho to find out what colored that decision and what potential limitations they noted. Since I didn’t get to, readers of this piece will need to do this bit of homework themselves.
Bottom line: I did hear customers say that Zoho One did most of the things a business could want and that their users were only limited by their imagination.
No software vendor can do it all
Every vendor has its core competency. Some have outstanding knowledge of a key vertical. Some are great at people related issues. Some have deep technical expertise. Or, it may have competence in a number of other expertise areas or offer great customer service. To create an outstanding application suite, a vendor has to be great in at several of these dimensions. But, NO vendor can be great at everything.
A smart vendor stakes out functionality, market segments and technology areas that it will do well and finds partners to provide other parts of the ‘whole product’. This is why many vendors have a number of services/implementation partners as the vendor may lack personnel who are skilled in change management or process re-imagination.
Zoho is no different in this regard. Some customers are using third-party solutions with Zoho applications in a couple of critical areas. One example involves the sales and use tax solution from Avalara. This vendor was mentioned to me by 2-3 customers. (Avalara is a software partner for Zoho Books). I’m not at all surprised at this as tax expertise is exceptionally complex, frequently changes and may require specialized knowledge and training to understand how it should be incorporated into software.
Vendors that are scaling usually grow their partner network. They develop relationships with service firms (e.g., consultancies, accounting firms, systems integrators, etc.), banks, software vendors with complementary solutions, etc. Zoho executives discussed the names of several partner firms and intimated that more are out there. We didn’t get an exhaustive listing of these and none were present at this event. The key upmarket scaling question for Zoho is: are larger, more global and more sophisticated/specialized partner firms entering Zoho’s partner ecosystem?
One of the more prescient comments regarding Zoho’s growing and upmarket ambitions came in a dialogue between analysts and leadership. A colleague wondered if Zoho would be looking outside the company to find talented executives who could grow the company to its next plateau (and beyond).
An executive team might be able to start a software company and grow its revenues to say $50 million USD before the growth is beyond the experience base or capabilities of these leaders. I’ve had this conversation with a couple of software founders over the years. In two cases, the executive team needed an infusion of leaders and skills to help grow the firm to the $100 million and $1 billion revenue levels.
There could also be process challenges looming. When software firms bring in new executives from outside the company, those executives may bring with them some business practices and colleagues that can negate some of the in-born differentiation and cultural distinctives that made the early success possible. These new players can bring in a number of common, but anti-customer practices to the company. If you don’t believe me, just look at how much larger a software contract grows as the company gets bigger. I don’t know why but outsiders seem to bring sales friction, higher prices, etc. to their new employers. It’s frustrating to watch and painful for long-time customers.
Zoho needs to inoculate itself from this as it doesn’t have to become an inevitability. Let’s see if Zoho can keep the pro-customer, cool, low-cost, low-friction brand for decades more.