As global SaaS firms face increasing costs and reducing margins and the spectre of being squeezed by private equity firms, staying profitable can be a challenge. One way to stay on the growth trajectory is to invest in the communities and culture where a client operates. India-based tech company Zoho is following this approach, which has contributed to its consistent growth even during turbulent times.
ISG analysts recently attended Zoho Day 2022, the firm’s annual analyst event, where this theme resonated well.
For the uninitiated, Zoho is a 25-year-old bootstrapped, privately held software firm that offers more than 50 products in CRM, workplace services, financial and HR, security and IT management and low-code/no-code development. Zoho sells these products in more than 180 countries to more than 500,000 companies with 80 million end-users. ISG covered Zoho’s strategy and vision at the same event in 2021.
Strategy Rooted in Culture
This year’s event was hybrid in nature, allowing analysts to attend both in-person in Austin, Texas, as well as virtually. It started with an opening note from Zoho’s CEO, Shri Sridhar Vembu, in which he shared his vision. He positioned Zoho as a sustainability-driven software firm, addressing the software needs of mid-to-large sized enterprises. Vembu defined Zoho One—a platform comprising all its 50+ products— as the de-facto operating system for businesses. Vembu spoke about Zoho’s purpose-driven philosophy, including initiatives such as Zoho Schools of Learning, a rural education that graduated 1,400 youth in 2022, and Marupadi, a career re-launch three-month bootcamp for women.
Vembu believes “strategy must be rooted in culture,” which is evident in Zoho’s approach to supporting the socio-economic environment in the regions where its clients operate. Zoho follows a “transnational localism” that involves developing a hub-and-spoke model, with local offices at client locations. It is also opening new local data centers that focus on data privacy.
The company remains privately held so it can continue its R&D efforts, own the complete technology stack for enhanced privacy and data sovereignty and develop its products in house. It was using its proprietary products Zoho Show and Zoho Backstage for managing the hybrid nature of Zoho Day 2022.
Success of Company Strategy
The success of Zoho’s strategy is evident in its robust growth numbers. Although its leaders and executives remain tight-lipped about the revenue numbers, other facts point toward remarkable growth ― more than a 30% CAGR and a similar increase in the number of paid users in the past five years and a healthy double-digit net margin during the same period.
It is interesting to note how astutely Zoho has distributed its business across geographies and industries since its inception. Zoho is present across regions and industries with “no region or country forming more than 50% of the revenue” and “no industry forming more than 25% of the revenue.” It has an attrition rate of only 8.5%, a number that its leaders consider “too high.”
Zoho also reports high client retention and an expanding partner ecosystem. More than 40% of Zoho One customers use over 20 of its products (from the pool of 50+ offerings). This has increased exponentially in the past three years. Its customer churn rate has steadily fallen and now stands at only 2.5%. In 2012, Zoho’s partner ecosystem was responsible for driving around one-eighth of its business. Ten years later, in 2022, it contributes almost a third of its revenue.
At the client panel discussions, Zoho clients from a diverse set of industries and regions shared why they choose Zoho. Most clients said they started with one Zoho app – Zoho CRM in most cases – and adopted other products along the way as they realized the power of an integrated solution. Clients acknowledged Zoho’s responsiveness to challenges and its ability to provide customization and integration with third-party apps. Interestingly, not many clients are leveraging the complete Zoho One suite at present and not all have started adopting its AI solution, Zia.
Zoho’s low-code/no-code solutions are set in the midmarket where businesses lack professional coding support. Many clients test other products before opting for Zoho Creator. Clients said they tried solutions from a few large competitors but ran into the challenges of a steep learning curve and high costs. They said they chose Zoho Creator for three prime reasons: cost, intuitive interface and quick results. It was not only affordable, but also enabled a client’s team to create applications from day one and start yielding favourable results from day two. Although the clients were extremely satisfied with the solution, they expressed the professional support could be improved. Zoho also shared examples of some larger clients with greater scale.
Around 20% of Zoho’s user base uses just its workplace solutions, including the productivity and collaboration applications. The client panel primarily included business-level rather than IT leaders, who started with other Zoho products before using Zoho Workplace. In our discussions with them, these clients acknowledged productivity and operational improvements after using Zoho solutions.
We know that employee experience (EX) is the key factor in workplace technology buying decisions for large enterprises. However, because of the size of Zoho clients, they did not seem too keen on measuring EX, particularly from technology usage perspective. Zoho is transforming its workplace solution experience with improvements that reduce context switching for employees, while accessing different enterprise applications within its mail solution interface. Although other leading vendors in the ISG Providers Lens™ Employee Engagement and Productivity Solutions study offer this functionality, Zoho differentiates itself by supporting third-party apps with this functionality.
Apart from Zoho mail integration with enterprise applications, Zoho also offers other promising products. These include unified search leveraging Zia that can gather data from multiple other Zoho applications; Zillium, a tailor-made app suite for family commercial use; Arattai. for secure peer to peer messaging; and Ula, a multi-modal browser to address privacy concerns.
In addition, Zoho indicated it is targeting large enterprises through its new Enterprise Business Solutions (EBS) unit and investing in marketing, sales and consulting capabilities. This means Zoho Will need to ensure that it maintains approachability with its existing clients, who are most likely to choose vendors that serve smaller clients. Zoho is also targeting large Indian firms with its solutions. With its strong data center presence in India, Zoho can get an edge in the Indian SaaS market if the Indian government introduces a local data residency and protection legislation.
Overall, Zoho Day 2022 was a well-organized event that highlighted Zoho’s differentiated approach of thriving with clients, its promising outlook and improved solutions. We will be watching to see if Zoho can maintain or even accelerate its growth with changing expectations and the challenging global business environment.
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