Zoho – Another Approach to Sustainable Growth

Phil Wainewright put up a very thought provoking post the other day, speculating if Zoho could outgrow Salesforce.com. A worthwhile read, the stand out bit being his summation;

A disruptive model? Just as Salesforce.com’s CEO Marc Benioff dismisses conventional software vendors such as Oracle and SAP as dinosaurs on the verge of extinction, so Vembu looks on Salesforce.com’s high-cost, premium-priced model (in comparison to Zoho’s) as a throwback to the days of old-fashioned enterprise software….. Meanwhile, Zoho’s decision not to turn to advertising as a source of revenue is also appropriate for the business market and a useful differentiator against Google, the other big player making headway in that mass SMB sector. On balance, Zoho’s model offers enough value to an under-served market to qualify as disruptive and its state of preparedness for a difficult economic environment could well see it emerge the other side of the coming recession as a leading player.

This got me thinking… So far most of the we dialogue on financial models has been based around a number of streams.

Freemium models seem to be getting the most coverage. I was never that impressed (Ben has a good piece here on why) and with the credit crunch I’m even less inclined to believe in this. To be honest I’d be amazed to see this one survive the credit crunch

Advertising supported – Google is the poster child. Fairly self-explanatory how it works.

Traditional pay as you go models – Salesforce.com There is another way to get scale, then monetise Internet assets, funnily enough it’s a variant on the Google model and is being used by Zoho. This approach is to use an existing revenue engine to fund the growth of the start-up, in Zoho’s case it is parent company AdventNet who are funding the Zoho development. The interesting dynamic here is the financial impacts. No debt and organic growth build rock-solid stability. I don’t believe people fully understand the economics at play here. The scale challenges a startup have to conquer are enormous, but when they get there the marginal costs plummet and accordingly your profits go up.  Check this from Zoho.

Google and Microsoft have clearly reached scale (in their own markets), Salesforce.com hasn’t… yet. I’m told that their PaaS play is starting to really reap benefits, huge customers signing up, customers putting Tb’s of Data thru a day. All driving economies of scale.

Getting back to Zoho, the more I look at it, the more I like the model. Self fund to scale, charge for premium services, consider a slow introduction of pay as you go later (I’d put in an easy migration path for those who aren’t ever going to pay) and above all keep it scaling. We see Amazon’s mantra all over again, ‘GBF’ “Get Big Fast”, but without the debt and with a fairly logical path to monetisation.