"Zoom pricing is far from mysterious or complex.
https://zoom.us/pricing"
I thought luciuse’s post was insightful.
Pricing, monetisation and go-to-market strategy
Let’s take a step back and consider that Zoom had in the >10 employee segment 81,900 customers in Q419 and 433,700 customers at the end of Q320. This is an increase of +430% across 3 quarters.
We don’t have the exact information for Q419, but let’s assume for this example that in this quarter the revenue contribution from customers > 10 employees was 50% (vs 25% <10 employees, 25% Enterprise):
In Q419 81,900 customers >10 employees generated $94m of revenue. In Q320 433,700 customers contributed $342m. Therefore in a period the customers increased +430%, revenue contribution from this segment was ‘only’ up +264%.
So what gives? For a start, there is a bit of lag simply because they are reporting customers at the end of a quarter but the revenue throughout. So 20,000 customers might’ve been added in October, which we only see one month’s worth of in revenue in Q3. You can see this exaggerated in the dynamic between total customers & revenue in Q1-Q2 in my second post. However, even taking away 30,000 customers for half of Q3 from Zoom’s total, that’s an increase of +393% in customer count vs +264% revenue contribution.
Next, throughout the pandemic Zoom offered free service to 125,000 schools. I am not sure which segment schools might be categorised into (preferably the <10 employee segment). It’d seem like a good question to ask them in the Q&A. Steckelberg (CFO) gave us some insight into how these might be being monetised in the call:
“So as I said in the prepared remarks, a large percentage of the growth in the usage was from education but both free and paid. And paid is certainly an – it’s an elevated percentage of our total usage. Education continues to be one of our strong verticals. It was the second fastest-growing vertical again in Q3, so really excited about the progress we continue to make there as well.”
What else might driving the ‘dilution’ of revenue contribution from customers >10 employees? Another factor is sales promotions. Clicking on the pricing link to Zoom’s website you can immediately see the 15-20% discount offer to sign up. I’ve noticed a sales promotion since the beginning of the pandemic whenever I’ve looked.
So monetisation of the free element of schools is one element that Zoom has, but how else can Zoom monetise its existing customers?
I find it helpful to think of revenue as ‘price x volume’. As rate of volume (new customers/subscriptions) slows as it undoubtedly will post pandemic, the rate of revenue will decrease at the same rate if the price were to stay fixed. So in this context ‘monetisation’ = price.
Monetisation and Pricing of Zoom’s customers
1. Price plans. For >10 employee segment, customers really have two standard options for Meetings until they reach the Enterprise bundle (100+ licenses). This is a $200 option or a $300 option for the add on features such as Phone and Chat (I had converted using fx rate on UK plan not noticing I could just filter to USD on Zoom plans, hence the difference to $216-$325 in my other post. US are getting a good deal vs UK!).
a. Upgrading customers from the $200 option (Business plan) to $300 option (United Business plan), with its added features & integration of Zoom Phone and Chat (some overlap with Phone opportunity here)
b. Increasing pricing. The more stickiness that Zoom can create with its platform and its features, the more the network or ‘viral’ effect, the greater its pricing power.
c. Add on plans. Currently offering Audio plans, Large meetings and Cloud storage add ons. Improve and expand on existing add-ons.
d. Improving features and functionality on existing plans to up-sell to premium option (eg Smart Gallery). CFO: “As we’ve seen the expansion in Zoom Phone, we’ve seen customers continue to ask for more features and functionality.”
2. Up-selling of its Webinar and Rooms features such as with Enterprise customer Rakuten, which has 1.4bn members globally, rolling out Rooms & Phone in quarter
3. Preparation for ‘post pandemic’. Steckelberg talked about how customers are putting in Zoom Rooms while offices are empty, and how Smart Gallery will help enable a hybrid work environment
4. Education. Currently $90 a license. Once committed to annual plans & fully embedded; pricing power.
5. Active host licenses. As the CFO indicated, active hosts largely relate to Zoom’s ‘upmarket’ customers (eg larger businesses & ‘Enterprise’ customers). This applies to customers with a minimum of 50 licenses: https://onlinezoomappdownload.com/discounted-license-for-com…. Conversion of those on an active host license to a standard business license represents a monetisation opportunity, as licenses are ‘trued up’. Drivers include the ‘viral’ effect of the platform across a company. The more active hosts the greater the upside.
6. Growth through channel partners, eg Lumen Technologies. Channel will open up new avenues for growth, and drive this viral effect. Integration of its services through these large telecoms partnerships as they shift to cloud represents monetisation opportunity (at least for Enterprise). CFO: "certainly, this is an area – it will be a driver – an area driving growth for next year”.
7. Government was the fastest growing vertical quarter on quarter in Q3. A pipeline of large government contracts can also help to accelerate monetisation.
N.B. The focus on conversion from monthly to annual plans primarily relates to <10 employee segment, to create stickiness of those customers. Monthly plans contribute +20% more revenue across Zoom’s plans.
While it’s impossible to break out exactly how much the monetisation opportunity each segment might drive growth next year, there will likely be at least some level of ‘price’ acceleration next year to offset vs the ‘volume’ deceleration of its biggest segment.
Go To Market
Really here’s what stood out to me about the Q3 earnings call, in terms of comments about Zoom’s go-to-market strategy in the pandemic, a story begins to form:
"We’re focused on delivering happiness to our customers so these are all things that are negotiable. The typical structure of a deal would be they would have access to a certain – a set number of licenses. They would pay for some fraction of that for the first year."
"I mean we really value our free customers, our free host, and we think they are very – they continue to be a very important part of this ecosystem."
"This is just the way that we’ve chosen to build our go-to-market, and that’s just sort of the trade-off when you compare us to other companies"
"We haven’t seen a significant change in our overall deal size. If you remember, LAND AND EXPAND IS STILL A VERY IMPORTANT PART OF OUR SALES STRATEGY. And we see customers doing that. We also see customers that are starting with, for example, Zoom Meetings and then add on – two of the customers we talked about today, Peloton and Rakuten, that added on Zoom Phone later. So not really a significant change in the overall deal size, especially at the start."
“We’ve also seen, even in the upmarket, people that are also expanding, continuing to buy more products, which makes them more integrated into the Zoom ecosystem and makes them more retentive.”
'Make your customers happy and the rest will follow.’ (Crowdstrike CEO George Kurtz from his interview with Lewis Hamilton that I watched yesterday). https://www.crowdstrike.com/resources/videos/formula-for-suc….
This certainly seems to be Zoom’s strategy from culture to product to pricing.
All of this feeds into my interpretation of Zoom’s strategy of loading up its customers as quickly as possible and the effective monetisation of these new customers being a secondary consideration during the pandemic. At least to some level we would expect increased monetisation next year, and that’s why it’s one of my 5 key growth drivers for 2021.
Really an investment to some degree comes down to risk-reward. While I do think Zoom’s upside might be somewhat capped over the next 6 months or so due to market sentiment and the uncertain level of growth post pandemic (which no-one, even Zoom management I bet, truly knows), I also think at $400 its downside is also somewhat priced in now compared to some other over-extended names (I know many, mostly traders, who would disagree).
It comes down to what level of growth Zoom can expect next year. The market seems to think not much since the vaccine news. I’m looking out for ways in that it might exceed these expectations. For now, the risk-reward is such that I’m happy to keep my position as is and to look at the bigger picture.