Xero 2017 Annual Report Interpretations

Xero’s 2017 Annual Report is out, and it confirms that subscriber count is increasing, but the subscriber growth rate is falling annually. If Xero’s global growth rate follows the trends of its NZ growth rate, then in about 3 years Xero will have subscriber growth of around 30% annually.

And, because Xero hasn’t been able to increase its revenue per-subscriber , its revenue growth will also fall to 30% YoY.

This isn’t inevitable, however. Xero’s primary competitor, QuickBooks Online, has twice as many subscribers as Xero, and just announced accelerating growth, increasing from 49% to 59%. So Xero can and should be doing better.

History to Date

Xero’s global subscriber count is impressive, growing more than 10x in 5 years, from 78,000 in 2012, to over a million companies using it today

But if we look at the growth rate from those numbers, it’s a very different story.

Growth is falling steadily. When and where will the growth flatline?

My best guess is to look at New Zealand, Xero’s home country and also where it entered the market first. 2017 growth numbers were 32%, down from 35% last year.

To guestimate the future, I overlaid the Global numbers with the NZ numbers, except I moved NZ three years ahead for best fit.

If the global trends mirror the market saturation and slowing growth of the New Zealand market, then Xero’s global growth (the blue line) will likely follow their experience in New Zealand three years prior (the green line).

Even Flatter Revenue per Customer

Flatlining subscriber growth wouldn’t be so bad if Xero could steadily increase subscriber revenue. But Xero’s average revenue per customer has been almost entirely flat.

Radical Change is Needed

There’s debate on who first said this, but most people would agree that

If you always do what you’ve always done, you’ll always get what you’ve always got.

If Xero wants to change its trajectory, it has to either A) reverse its falling growth numbers and start to accelerate its subscriber growth, or B) significantly increase its per-customer revenue. Either of those will require substantially different action that what Xero has done so far.

Accelerate Subscriber Growth

Xero has hopefully realized that the North American market will not save it. QuickBooks Online is simply crushing Xero here, and absent divine intervention, winning the North American market is at best a 20 year slog. So global growth in the next decade cannot rely on North America.

Luckily, the globe is big place. Unfortunately for Xero, not all of the globe speaks English, and Xero has amazingly announced it has no plans to translate its software to other languages.

Xero should probably start translation into Spanish, Portuguese, Russian, and French right away. Mandarin and Arabic might be a bit trickier programatically but should be next after the Romance languages and Russian. Hindi can be last, as so many business owners in India already speak some English.

Other global companies manage to translate their software. If Facebook can build a translation for Klingon, then surely Xero can build a translation to Spanish?

Radically Increase Per Customer Revenue

Xero has been unimaginative when it comes to increasing subscription costs. Usually they nudge up the cost of their subscription by a dollar every year or so. Their most recent change means new customers will pay in advance rather than monthly arrears, and existing customers will pay 10 days earlier. Both are good ideas, but this is marginal improvement, not radical change.

We have specific insight into why Xero could dramatically change its pricing. Our company produces software that integrates Salesforce with either Xero or QuickBooks Online. So I see companies with 50 to 200 staff using Xero. These are companies with tens of millions of dollars of revenue, running their accounting software for $30 a month. Is Xero not capable of capturing more value from this segment by charging more?

Xero does not exist in isolation — it is part of the accounting landscape. But what makes Xero uniquely positioned to increase subscription revenue is how barren the SaaS Accounting landscape is for mid-market companies.

Put another way, if you want a cloud-based accounting solution more advanced than Xero, you need to go upmarket to heavy-hitters like hosted Microsoft Dynamics, Netsuite, or FinancialForce. There’s just not a lot of compelling mid-market options, not unless you want to start installing software on your desktop.

The result is that a significant portion of companies that don’t find a good mid-market solution go down-market to Xero and push Xero’s capabilities to the limits, all while demanding more features. This market segment is screaming to be serviced by a mid-market SaaS accounting solution, and has the money to pay for it, and they already have a relationship with Xero. Why not monetize this segment?

Start Charing $1000 USD a Month

Xero could create a dedicated Enterprise version of its software and charge $1000 a month for it. Uptake might be low at first, but if it can move 2% of its customer base onto that, and attract half that again in new customers, Xero would have doubled its annual revenue.

Xero customers with budget to spend are demanding features like:

• Increase Tracking Categories from the current 2 to 4, or even 8
• Multiple Custom Fields on the Invoice (QuickBooks Online offers 3)
• Unlimited API access (Xero API calls are capped at 5000 per day, compared to QuickBooks Online at 500 per minute)
• Dedicated fast servers so reports and API queries are always generated near real-time
• IP Address login restrictions for security minded companies
• Company specific sub-domains (think acme-llc.my.xero.com)
• Granular User / Profile permissions (Read Only users that are limited to just AR or just AP)
• Enhanced Audit Logs

Without forcing a price increase on any of its customers, Xero could could start offering this higher tier of features at a new Enterprise plan.

And, while Xero is at it, it could offer a $2500 a month package with the ability to book sessions with a Xero engineer and have 24–7 phone support to the second tier help desk.

Excuses are like…

Xero management and engineers, if they read the above list, will jump up and down and shout, “Doesn’t he have any idea how hard that is?”

Well, I do know that building all those features will be easier than winning the North American market, which is well and truly lost to Intuit. And also easier than winning other countries Xero doesn’t yet have language translations for.

Ultimately, if Xero wants to increase its revenue and profit, it will need to ‘go more enterprise’ as Jason Lemkin likes to advise startups. It’s either that, or flatlining at 30% growth by 2020.