slack-business-model

How Does Slack Make Money? Slack Business Model In A Nutshell

Slack follows a freemium model, where a free version is offered, and users can convert in paying customers if they want more usage or advanced functionalities. Slack combines the free model with a direct sales force to acquire enterprise customers with yearly recurring revenue of over 100K. Those customers were 575 in 2019, and they accounted for 40% of its revenues. 

Slack background story

Stewart Butterfield is a serial entrepreneur, co-founder of the photo-sharing website Flickr. He went through the founding of several companies, in particular, when he founded Glitch (an online game). 

When he was running Tiny Spek, which comprised a set of companies Butterfield and his team needed a communication system to handle the teams within his organizations. That tool was developed in-house, and it eventually became Slack.  

When Slack launched, back in 2013, more and more companies signed up, until its growth kept compounding. Where did this opportunity come from? The timing was right!

As Butterfield said in an interview for CNET: “In the last 15 years, the Microsoft hegemony and Office and Windows worship has broken down, and as a result, we’ve gotten a lot of new and, in most cases, better tools…But that means information is scattered across a bunch of different tools and there’s no one search tool that you can go through to search across all of this.”

From that stage, Slack kept inviting larger and larger groups of companies.

Breaking down Slack vision and mission

Our vision is a world where organizational agility is easy to achieve, regardless of an organization’s size

Therefore, the challenge for Slack is to organize larger and larger groups of people within organizations. Indeed, Slack has been using its enterprise customer base more aggressively in the last years.

Our mission is to make people’s working lives simpler, more pleasant and more productive

The value proposition and mission of Slack starts from its willingness to reduce fragmentation within tools used by organizations. One of the critical elements of Slack is the integrations with other apps and tools, to bring this information together.

slack-timeline
Source: Slack Financial Prospectus

How does Slack make money? Slack Freemium subscription model

It generates revenue primarily from paid subscriptions. Those subscriptions are paid either on a monthly or annual basis, based on the number of users a company has on Slack.
 
Slack offers four subscription plans:
  • Free,
  • Standard,
  • Plus,
  • And Enterprise Grid.
slack-subscription-plans
Source: Slack Financial Prospectus
The Free, Standard, and Plus subscription plans consist of a single workspace or a basic Slack environment configured for each team.
Slack leverages on a freemium model, that makes it easy for small organizations to try and understand the value of the product.
Once those organizations are “locked-in” Slack offers additional capabilities (unlimited integrations, shared channels, guest accounts) that drive the free users to become paying customers. 
 
The Enterprise Grid package instead, is made for larger organizations with – at times – tens of thousands of users. As Slack points out in its financial prospectus, this requires a product that has enhanced functionality, flexibility, administrative control, and security at scale.
 

Enterprise Grid also allows paid customers to:

  • Create and manage an unlimited set of connected workspaces and channels;
  • Search across multiple workspaces, making it easy for workers and administrators to tap into their organization’s collective knowledge at scale;
  • Access centralized controls to ensure a company’s data remains secure, giving administrators a single point of visibility to provision and manage Slack; and
  • Integrate with third-party e-Discovery and data loss prevention tools to help meet security and compliance requirements.
slack-paid-plans
Source: Slack’s website

Slack sales and marketing strategy dissected

Slack combines a self-service go-to-market approach to attract non-paying users. At the same time, it uses direct sales efforts to growing the paid users within larger organizations.
 

Therefore the sales process usually follows this flywheel model:

  • The Slack free version easily attracts a large number of users
  • Self-service users become leads for salespeople
  • Salespeople convert free users in paying customers, usually within larger enterprises
  • These larger enterprises that join in, create organic awareness of Slack inside and outside of their organizations
  • Slack keeps investing in its product, and customer experience
  • It also employs after sales customer success representative, which makes it easy to trigger referral customers

By looking at the company financials Slack has invested substantially in sales and marketing efforts. Indeed, the company spent almost 99% of its revenues in 2017 for Sales and Marketing activities. This number stabilized to 63.5% in 2018 and 58% by 2019.

Thus, the freemium business model of Slack still needs some fine tuning to find the right balance between growth and profitability. In fact, as of 2019 the company still reported net losses at the time of its IPO.
As of now though Slack is pushing on sales and marketing activities to sustain its momentum and growth.
Among the marketing strategies and tactics that Slack adopts to drive initial awareness and adoption, there is the Slack website through which users are driven in a frictionless way through the free plan.
In short, Slack is acquiring users at high speed, without creating a high touch sales experience. Instead, it is relying on its low-touch, frictionless process, to bring in as many active users. Therefore, at that stage, the Slack product team focuses on organic growth and adoption.

Once the pipeline is ready, the sales team and the overall organization, instead, focuses on two key metrics:

  • Free-to-paid conversion
  • And the net dollar retention rate
When it comes to the acquisition of paid clients, for larger accounts, the sales team uses a high-touch sales approach, which complements the self-service approach. The sales team targets C-suite executives, and leaders of a specific business unit.
Therefore, that also includes resources for direct sales such as:
  • Field sales force,
  • Solution engineers
  • Demand generation campaigns
  • Webinars
  • Analyst relations
  • C-suite events
  • Partnership marketing and co-marketing
  • Annual user conference

Who are Slack’s paid customers?

Organizations on Slack are of all sizes:
  • Individual entrepreneurs,
  • Freelancers,
  • Emerging small businesses,
  • Multi-national corporations.
They work across a wide range of industries. According to the Slack 2018 Survey, more than half of its users are in non-technical roles.
As of January 31, 2019, Slack reported more than 600,000 organizations with three or more users, broken down as it follows: 
  • 88,000 Paid Customers, including more than 65 of the companies in the Fortune 100,
  • and more than 500,000 organizations on Slack Free subscription plan.

paid-customers-slack

Source: Slack Financial Prospectus

Who’s the customer that really matters to Slack?

Slack also tracks another kind of customer, the one who has a higher ARR, compared to regular paying customers. This cohort is made of companies with an ARR (annual recurring revenue) higher than $100K.

That is used as a key indicator for the growth of the business. In 2017, 2018, and 2019, those represented approximately 22%, 32%, and 40%.

paid-customers-100k-arr-slack
Source: Slack Financial Prospectus

Slack functionalities and product

slack-functionalities
Source: Slack Financial Prospectus
Slack key functionalities can be broken down in:
  • Messaging and Channels:The channel is the fundamental unit of Slack. Indeed, through the channels people are organized to collaborate on specific tasks, to share information, and get work done. Channels are organized by project, topic, team, or based on the organizational structure and situation. Channels can be public, thus accessible to anyone in the Slack organization. Or private, so that they are available only to certain people within the organization. Messaging happens through the channels. 
  • Integrations: Integrations help companies to gather information from other applications. Integrations with software like Salesforce help salespeople be more productive. Advanced use cases can help design custom workflows, to perform tasks and actions in Slack. For instance, by integrating Slack with the invoicing system reports and digests can be pulled up from Slack. 
  • Shared Channels: Shared channels connect Slack workspaces of different organizations. Shared channels can be public or invite-only.
  • Search: Everything in Slack, is searchable, so that information within those channels can be retrieved easily.

Is Slack blitzscaling

slack-financials

It’s interesting to notice how Slack almost quadrupled its revenues from 2017 to 2019. However, it also doubled its expenses. Thus, Slack seems to be in a blitzscaling phase, where it prioritizes speed and growth over anything else. As of 2019, the company is still running at net losses.
Usually, companies blitzscale because they want to quickly gain market shares, and be in a position of dominance. Or they do it to defend their business. In 2018, Microsoft announced the free version of its Microsoft Teams. Apparently, the move from Microsoft tried to keep up if not dominate the space, thus, take over Slack.

Key facts and statistics from Slack business model

  • Of the over 500K free users, 88K are paid accounts.
  • Within the paid accounts, there is the category of businesses that make over $100K per year in recurring revenues. Those were 575 in 2019, and they represented 40% of its revenues.
  • Slack spent almost 99% of its revenues in 2017 for Sales and Marketing activities. This number stabilized to 63.5% in 2018 and 58% by 2019.
  • Slack follows a freemium model pattern which quickly brings in free users, which then get funneled within Slack direct sales effort to turn them in paying customers
  • Slack primary value proposition starts from fragmentation among tools used by organizations to handle their internal communication workflows

Source: Slack Financial Prospectus

Other business models in a nutshell: 

Other business resources: 

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, professionals, and entrepreneurs in 2019 alone | Gennaro is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

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