The executive was a Former Product Growth Manager at AppFolio for over 6 years with experience launching new features and product lines with the original founders of APPF.
Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.
I joined AppFolio after a diverse career in sales and hospitality. I also owned a coffee shop in Colorado, which I sold before moving to Santa Barbara. While exploring opportunities in Santa Barbara, AppFolio consistently came up as a reputable organization within the tech industry and the community. Consequently, I focused my job search on AppFolio and was hired as a manager on their Value Added Services team.
I'm sure you're familiar with the structure of our business. I managed the screening team and shortly after joining, I had the opportunity to represent our Value Added Services team on a market validation project. This is something AppFolio excels at, and I believe it's a significant contributor to their success.
The market validation process, which was established by John and Klaus, the company's founders, involves a thorough examination of potential new products or services. This isn't about feature enhancements, but entirely new offerings. A team, typically including a product validation lead, product engineer, product manager, UX designer, business line owner, and an executive sponsor, would spend three to six months on this process.
The process begins with a deep dive into discovery work, understanding competitors, customer pain points, and consulting with internal and external experts. The goal is to determine whether there's a problem that's significant and widespread enough to warrant the allocation of resources to solve it.
If the answer is yes, the team develops a Minimum Viable Product (MVP) and presents it to a set of customers, either as a prototype or a simple slide deck. The team gathers feedback, makes necessary changes, and determines the essential features, potential pricing, customer adoption, and usage.
After three to six months, we have a good idea of whether the proposed product will be successful. We also work with the finance team to create a Return on Invested Capital (ROIC) model, providing insight into when the product will become profitable, the expected margins, and adoption rates.
This process, while not foolproof, gives us confidence in deciding whether to dedicate time, energy, and resources to a new product. It also helps us decide whether to buy, build, or partner.
The process was influenced by a book called "The Four Steps to the Epiphany".
Yes, it’s great that you know this. Marty Cagan, who runs the Silicon Valley Product Group, also had a significant impact on our product model. His approach to product development, particularly the initial discovery work, resonated with John and Klaus. They adopted this process even before they started AppFolio, using it to explore various opportunities. They found it effective and have continued to use it.
Yes, you're correct. Neither of them are actively involved now.
From my understanding, the philosophy is still very strong. The product validation team has grown and continues to follow a similar process for validating new products and opportunities. We used a similar process when developing the investment management vertical, which I worked on with John and Klaus.
The narrative has probably changed a bit now that it's more remote. But at the time, it was frequently discussed. Interestingly, Yardi is also in Santa Barbara, specifically in Goleta. There were many people transitioning from Yardi to AppFolio.
It is unusual. I believe it's just a coincidence, but it's quite remarkable, right? The headquarters is located in Goleta, near the Santa Barbara airport, which is also where UCSB is. It's essentially Santa Barbara, and there are some other major tech companies in the area. I believe UCSB is a good source of talent. There are people in the Bay area who want to continue working in tech but don't want to live there, and they've come here.
AppFolio has a good local reputation. I have nothing negative to say about it, and I believe others who have left for other opportunities would say the same. Reflecting on my time there, I realize there were things I took for granted. AppFolio is a well-oiled machine. They excel in areas that other organizations strive for, and I didn't fully appreciate this until after I left.
I'll speak specifically about the product work, as that's what I'm most familiar with. AppFolio has established processes and working relationships, and their approach to problem-solving is commendable. One thing that stands out is their product validation. They prioritize finding a product-market fit before dedicating resources to a product. They don't just build a product based on assumptions and hypotheses. They have conversations with customers and conduct research. The goal during validation is to invalidate assumptions.
Exactly. They get to the core of the problem, peel away the layers, and identify the job to be done. They excel in this area.
When I joined, the company had just gone public, and the focus was on growth. At that time, our operations were solely focused on SMBs. Everything was done in-house; we didn't have partnerships or open APIs. We catered exclusively to SMB customers. Shortly after I joined, we increased the minimum number of units from 100 to 200, indicating a shift towards larger clients. We began to realize that we were investing a lot of energy and effort into smaller businesses, which might not have been the best use of our time.
Another significant change occurred in how we onboarded customers. I was managing the screening services team, which was a value-added product, as was our payments service. Around 90% of our customers used screening and 80% to 85% used payments. We decided to integrate these services into the implementation process, setting up customers with payments and screening during onboarding. I helped transition that team to our implementation team, marking a shift in our approach to customer onboarding.
It was only a couple of years before I left that we began to focus on moving upmarket and targeting larger customers like Greystar. One of the strategies I was excited to see implemented after I left was a greater focus on partnerships and opening up APIs. This was a necessary move to attract larger clients who were already using services like Property Meld. They had invested time, money, and energy into training their staff and establishing workflows with these services, and they weren't going to stop using them.
Yes.
The development of AppFolio Plus, our product with open APIs and partnerships, began before Jason left. We were already conducting research and working with customers to build it. We also started hiring more people to work on partnerships and build relationships. Early on, we realized that if we wanted to move upmarket, this product had to be part of our strategy. We wanted to maintain control over the customer experience, so we were hesitant to open up too many partnership opportunities and open APIs. With AppFolio Plus, we could still offer the basic AppFolio product and control the customer experience, but also give customers the option to integrate their partnerships. This happened before Jason's departure, but I believe Shane expedited the process and added more urgency. That's one of the main differences I see between Shane and Jason. Shane, coming from Salesforce, brings a greater sense of urgency.
I believe it's because Shane, having come from Salesforce, had seen what it takes to grow an organization. Jason, on the other hand, seemed comfortable with how AppFolio had been operating. It was a well-oiled machine. Part of my job involved working with our M&A team. We often explored potential acquisition targets at the directive of upper management. However, many of these opportunities didn't come to fruition, and I think Jason was the bottleneck.
I never heard directly from him, but I believe it came down to priorities. If you prioritize something, you usually have to deprioritize something else. Many of the potential acquisitions we considered didn't go through because of the mindset of developing in-house. For example, we once considered acquiring Property Meld. That didn't happen, and instead, we spent a lot of time improving our contact center and integrating the technology we acquired from Dynasty. We aimed to streamline the process for both the customer and the tenant and improve the contact center's margins. We made improvements, but ultimately, we ended up partnering with Property Meld.
To be honest, I don't know the details. I'm not sure if they were up for sale or if we approached them with an offer. However, I do recall a colleague from the M&A team mentioning Property Meld. We had worked together on a project related to our contact center, and he expressed regret that we didn't acquire Property Meld when we had the chance.
I'm not sure, but that's a good example. We internally validated the concept of revenue management at least twice. It's like discovering a challenge or opportunity but not knowing how to address it. I wasn't directly involved in those, but I do remember LRO.
It's because it's labor-intensive. You need to staff an entire contact center with people to answer the phone.
There are a couple of ways. The tenant can either log into their AppFolio resident portal or call in. Many choose to call because they want immediate action. They don't trust that typing something into a portal will get the job done. So, they call in, report the issue, and the contact center logs it in AppFolio and notifies the property manager. There are different levels of priority. For instance, fire, flood, or blood is considered an emergency and gets dispatched right away. Some property managers prefer AppFolio to dispatch it, while others just want a notification and they handle the dispatch. By dispatch, I mean sending their maintenance crew.
We wouldn't have one internally. They would either have a contracted crew that they use frequently or some of the larger property management companies have in-house maintenance teams.
If you wanted us to dispatch it, you'd give us the contact information. Typically, it was for property managers who had internal maintenance teams. If they're using external contractors, we would typically notify them. Some who contract out might have their own electrician, plumber, or HVAC technician. They could provide us with that information, and we could dispatch them. However, this usually happens if they have their own team.
Yes, they would typically need to have access to AppFolio.
Yes. Even some companies with internal maintenance want to receive the request first. They can then see if, for instance, Bob is already in the neighborhood and finishing up a job in an hour. They can then dispatch him, so there's some coordination that occurs. Our contact center representatives need to spend time on the phone with the resident to triage the situation. For example, if there's a leak, they need to determine if it's a drip or a flood. There are many questions they need to ask, especially for complex issues like HVAC.
I believe it was a per-unit price, as an add-on.
When I started, it was $1 per unit. During my tenure, we increased it to $1.50 per unit. This increase caused some stir. Some people were not willing to pay $1.50 per unit for phone answering services. Property managers also have slim margins. We didn't feel like we could go much higher than $1.50. Even that price faced pushback. The timing and manner of the rollout didn't coincide with any significant enhancements or additional work done. It was just a price increase.
It was roughly 40% from SMBs.
Yes.
For SMBs, many people didn't feel comfortable letting someone else manage or handle one of their areas of work. However, I'm not 100% sure.
Yes, that's correct.
I didn't delve deeply into enterprise customers in the project I was working on. However, most enterprise customers either outsource a contact center or use generic call centers in countries like India where they can hire two or three people for $3or $4 an hour to answer phones, handle maintenance calls, and perform a few additional administrative tasks. We certainly observed some of that.
The first issue that needs addressing is margins. I don't believe a large customer acquisition push will solve the problem. The more they can automate workflows and increase margins, the more profitable the business will become. A lot of work went into this, although I'm not sure where the product stands today.
That's exactly the work that was being done, and Property Meld does this very well. I'm not sure if they still have a staffed maintenance contact center today. I suspect they do, primarily because they service a large portion of the SMB market. SMB property managers tend to be quite archaic in their processes and often resist automation due to comfort levels.
I was involved, but not in the acquisition itself. I joined right after the acquisition took place. Dynasty is the group that brought Lisa, the AI leasing agent. This is an example of where AppFolio could have done better in product or market validation before the acquisition. We were all excited about the AI tool, Lisa, that Dynasty had built. It seemed like a great solution that could potentially reduce staffing needs and alleviate leasing concerns. However, we found that our customers were not as enthusiastic for two reasons. Firstly, they didn't trust it. Secondly, they had been working with a human leasing agent for the past five years and didn't want to replace him with a robot.
We didn't gain significant traction in the market initially. After the acquisition, we conducted a sprint validation. This involved myself, Klaus, Elliot from Dynasty, and John, Jason. We were all individuals with limited time.
Yes, it was fun, but also stressful. Klaus suggested we start sending calendar invites to people for calls. The idea was that they would see the invite on their calendar and forget about it, then wonder who sent it when the call time came. This was our approach.
Yes.
Yes, Klaus suggested we just send the invites. It was a learning experience working with that group, but also stressful. It gives you an idea of the urgency behind our efforts. We had invested a lot of money and needed to make this product work.
We called our approach 'Lisa lobotomy', which was an internal joke. We trimmed down the features and made it more of a supporting role than a leading one. We aimed to automate some tasks that a leasing agent does, but still allow the agent to interact personally with tenants. Many SMB customers value this personal interaction and the gut feeling a leasing agent gets from a tenant. Lisa wasn't going to be able to do that initially. So, we looked at ways to streamline processes and support leasing agents. However, justifying the cost was challenging. We had to demonstrate that it would free up a significant amount of time for the leasing agent. Also, leasing agents are often paid based on renting a property, not by the hour.
Despite these challenges, we managed to pique people's interest. Part of the appeal was that this technology could support other areas of the business, like a maintenance contact center. We also encouraged people to work with us as a 'development partner', to help shape the evolution of the product. We shifted our focus more towards enterprise customers, who are generally more open to new technology and less attached to their existing systems. If they could automate half of their leasing staff, they were willing to do it. This was the shift we made, focusing more on enterprise customers.
I'm not certain. They were still trying to figure that out when I left. However, I believe they started to gain some traction. They managed to interest one or two enterprise customers and some top-tier SMB customers in using it.
Elliot? Yes, he's involved in other projects now. He's managing another vertical. It's something in retail.
Are you referring to the property manager or the tenant?
At a high level, I don't know of any property manager who wasn't using some screening service. Some were basic, others more robust. The advantage of having it in AppFolio is that it serves as a single source of truth to a certain degree. You don't have to take screening information and input it into AppFolio and attach it to an application or a tenant. It's all right there. That's why we had such high adoption. It just makes sense. Moreover, you can pass that cost along to the tenant in the application fee. So it was like $3 per screen. You're just incorporating that into the fee. Most property managers, 99% of them, are just including that in the application fee. So it's no money out of their pocket.
If I'm an applicant applying for a property, I'm filling out a rental application, and part of that is agreeing to a screen. At the time when I was there, and I believe this has evolved due to disparate impact and other factors, there were two levels of screening that the customer could choose. One was just basic credit history, and the other was credit and criminal. Some property managers didn't run criminal checks because they were afraid of getting involved in disparate impact litigations. Disparate impact is essentially unintentional discrimination. I think it was $2 if you just had the credit check.
It was less about rejecting someone due to their criminal history and more about avoiding disparate impact. For instance, property managers could face discrimination charges if they refused to accept a tenant like John, due to his criminal history. Generally, and this is a stereotype, individuals with criminal records also tend to have lower credit scores and a lower debt to income ratio. These factors are taken into account when assessing potential tenants.
Another stereotype, which is also a reason why disparate impact exists, is that minorities, regardless of whether they have a criminal record or not, often have lower credit scores and a lower debt to income ratio. As a property manager, I need to be careful about setting my acceptance criteria. If I set a high credit score and a specific debt to income ratio as requirements, I could indirectly discriminate against or exclude a certain portion of the minority population.
Disparate impact became a hot topic due to some litigations in the property management world. Despite this, many property managers still run criminal checks but exclude them from the evaluation process.
Typically, property managers do have acceptance criteria for each property. These criteria can vary depending on whether it's a multifamily unit or a single unit, and they can also depend on the owner's preferences. This information is usually standardized in AppFolio. The leasing agent has access to it based on the property. When they run the applicants' screening, they check credit history and debt to income ratio.
Experian also offered a product through RentBureau. If the property manager is signed up for it, and I have a tenant paying rent through me as a property manager that's signed up for RentBureau, that information can also be included on a screening report. This report provides additional transparency by showing whether the tenant is paying their rent on time and how often they've been late.
Are you asking about the process after they run the screening?
We partnered with Experian. As a result, the credit report was included in the rental application for the property manager. The criminal history was also included in that report.
It's from several sources. Criminal records can be complex because some states and counties don't readily provide that information. In certain counties, you can access the information, but it requires physically sending someone to the courthouse. Therefore, we had two layers of screening, as we weren't going to send a runner to a courthouse to gather that information.
I believe it was $2 for the credit and an additional dollar for the criminal. You could purchase the credit report alone, but not the criminal report. As a property manager, you can't screen someone solely based on their criminal history. It was either credit or credit and criminal, and I think it was $2 and $3 respectively. I don't recall how much Experian was charging us for those screening reports, but the margins were around 70%. They were quite good.
Yes, I believe so.
Not really. Considering the number of customers, 90% of our portfolio customers used our screening service. At the time, I had a team of three, whose main task was to get customers onboarded and ready to use the screening service. They ensured that the customers were using the screening service appropriately and didn't have a criminal history or record of fraud. The onboarding process for screening typically took around six or seven business days. It was a quick process handled by three people for all the customers.
All customers.
Yes, unless they've established partnership opportunities with other screening companies, which I don't think they have. Screening is one of those services that takes, on average, six days to onboard. It's not a sticky product, other than the fact that it's integrated into your system.
If any, is the answer to that. It was rare.
They were quite similar. Yardi and RealPage were likely doing something very similar to what AppFolio was doing. Some SMB customers didn't use screening because they had been using a particular screening service for years that was hyper-focused on their area. It cost them a dollar per screen and although it didn't provide as much information, it worked for them because they only had 100 units. However, all the screening products were pretty similar.
I'm not sure if you could increase prices significantly.
Correct. And the cost is passed on to the customers. They roll that into the application fee.
It typically varies, but on average, it's around $25 to $35. There are caps on what that can be. We had a conversation with customers about payments at one point and how it's going to cost a bit more, potentially. And could you roll that into the application fee? And they're like, my application fees are topped out. Like, I can't go anymore because X down the street is charging $30 per application fee. I mean, that's big enough. A $5 variance in application fee is a big enough variance for an applicant to be like, I'm not going to apply here for the $35. And this property is very similar in a similar neighborhood. $30, I'm going to apply here. And I think there's also caps put in place on how much property managers can charge.
They would include administrative tasks. For example, leasing agents that are looking through a number of applications.
It probably is just a US thing.
If you think about it, in places like New York City, where the inventory is super low, I'm not just applying at one property. There's a lot of demand. And then the other thing, in New York City, this is an outlier, but their application fees are exponentially higher. I don't know if there's caps there or how they get around it.
They could cost you $1,000.
The only thing that comes to mind is the RentBureau concept we discussed earlier. It provides another layer of transparency into how the applicant performs over time. For instance, if I see that an applicant rented with X and always paid his rent on time for two years, that's valuable information. However, it's challenging to get customers to sign up for this. It's only beneficial for me if an applicant has rented with a customer who has signed up for it. If there was a way to increase the adoption of this and provide additional information, then a price increase could be justified. If you consider an 80% or 90% adoption rate, even a $0.50 increase would net a significant amount of money. I believe there's room for that.
Yes, exactly. However, one must tread carefully. When I was there, any time we discussed pricing, property managers would accuse us of nickel and diming. I read the Reddit thread you sent me about ACH, and I found it amusing. Someone in the comments pointed out the irony of property managers complaining about price gouging when they increase rent every month or year. I'd be interested to see the profile of those commenting. I don't think enterprise customers are bothered. They probably think, "It's an extra dollar per unit. I'll roll that into my management fees so my tenants don't have to worry about it." Also, consider that the cost of mailing a check is around $2.50 when you factor in time and other costs.
The majority was ACH.
Consider a customer who is paying a $1,000 rent on a credit card. They would be paying at least $25 just to make that payment. The cost for debit was even higher at the time. People often see the price increase but don't consider the other factors. When I started working at AppFolio, one of my first questions was, why are we offering ACH for free? It seemed like a significant opportunity to generate revenue. However, AppFolio's strategy was to get people on the platform, underprice, encourage adoption, and make our product indispensable. I didn't mean to sidetrack the conversation, but it's crucial to be careful about how you roll out these changes. They can upset people who don't consider all the variables or alternatives, especially the SMB customers. I suspect that most people responding on Reddit probably don't manage many units.
Yes, there were many tenants, but also some property managers.
They could potentially increase their management fees or rent. Enterprise customers are always looking for ways to differentiate themselves in a competitive market. They could market the inclusion of ACH payments as a benefit for the property. For instance, why would a tenant rent from Bob when they could rent from John, down the block, in a similar building? Well, Bob offers smart home technology and free ACH, making the tenant's life easier.
The two main ones are tenant payments coming in and property managers paying out to owners.
They will now if they want to use ACH. I don't think they were doing so before. Many of the SMBs were probably sending paper checks to owners.
I'd say, more than that. Considering the volume of tenants, there are significantly more tenants than owners. Tenants make payments monthly, while owners are typically paid either monthly or quarterly. However, the number of owners is just a fraction of the number of tenants.
Yes, indeed. Another revenue stream that we didn't fully capitalize on during my tenure, but they might be doing so now, is the payment flow between property managers and maintenance staff.
Very few owners probably want a monthly payment. The more standard cadence for that is likely a quarterly check.
Some do, if the owner doesn't have access to AppFolio or if they don't want to provide their bank account information. But that's more so the small, mom-and-pop owners. If you've got someone with multiple properties or multiple owners on one property, it's typically done through ACH.
Most people using payment screening was about 90%. Payments at the time were around 80% to 85%.
That's a good question, and I don't have an answer to that.
There are a couple of challenges. One is the speed at which to do that. Many enterprise customers have someone dedicated to being a gatekeeper for new technology. They want to test it and then gradually transition. If I've got 50,000 properties, I'm not going to switch everything over to AppFolio all at once. I'll probably start with a few properties and gradually make the transition. The time it takes to make that switch is a challenge. Another similar challenge is that products like AppFolio, Yardi, and RealPage are quite sticky. Many people are frustrated with their property management solution but feel tied to it because they've done the training.
Yes, we've had many customers who were frustrated with Yardi.
Yes, I believe they can. They've done a good job of bringing on board some key influencers, for lack of a better term. I keep mentioning Greystar as they were one of the early adopters of AppFolio Plus. Having these larger organizations trust and promote the product will generate interest from other enterprise customers. Another critical move they made was opening up their APIs and building a partnership ecosystem. This is something they'll need to continue doing. Many of these enterprise customers work with a network of third-party solutions that need to integrate with the core accounting system. If they don't, there's no point in using that system if they already have one that integrates with their third-party solutions. These are the two critical factors for moving upmarket.
I believe it would be because they lost focus. They need to continue innovating. Automation was a hot topic even two years ago, and it's likely even more so now. They need to leverage the technology they acquired through Dynasty to automate processes. There are many aspects of accounting and workflows that can be simplified through automation. If they fail to do this, they'll likely fall behind.
Around 60%.
I don't know if that's the aim. It was around that figure when I was there, but I believe the aim is higher. It's encouraging to see the growth, especially with the ACH payments working well. That's one of the reasons why the stock is up.
Yes.
Yes, so how do you sustain that growth?
Yes, another thing we haven't discussed, which has always intrigued me, is the international market. When I was there, we took a deep dive into exploring opportunities. Jason was at the helm, and I think he made the final decision. The enterprise market will probably continue to see some shift and people transitioning from one software to another. There's a long tail to that sale. It's not just about moving 50,000 units all at once, there's testing involved. And if you want to layer in value-added services, there's more testing and competition. The sale becomes more complex.
Oh, you did?
When we looked at it, a few countries rose to the top. Canada seemed like a likely choice because there's less need to modify the software for different languages and rules. It's a fairly large country. The UK also looked interesting, but as Nat pointed out, it has a lot of complexities. We could focus on the UK or we could focus on another value-added service that could potentially generate similar or more revenue without as much complexity. Germany was also interesting. There was a third one, but I can't remember. There are definitely a lot of interesting markets, like Australia and New Zealand. India was another country we looked at, but it was a bit daunting. The idea of going international has been discussed since I started, but no one has made that move yet. It seems like a logical next step in terms of customer acquisition.
We've also considered the commercial sector. It's quite intriguing. We've explored commercial, student, and community associations. The commercial sector is particularly interesting. We've conducted an extensive review of it. Are they currently involved in any commercial activities?
That's another intriguing aspect.
This document may not be reproduced, distributed, or transmitted in any form or by any means including resale of any part, unauthorised distribution to a third party or other electronic methods, without the prior written permission of IP 1 Ltd.
IP 1 Ltd, trading as In Practise (herein referred to as "IP") is a company registered in England and Wales and is not a registered investment advisor or broker-dealer, and is not licensed nor qualified to provide investment advice.
In Practise reserves all copyright, intellectual and other property rights in the Content. The information published in this transcript (“Content”) is for information purposes only and should not be used as the sole basis for making any investment decision. Information provided by IP is to be used as an educational tool and nothing in this Content shall be construed as an offer, recommendation or solicitation regarding any financial product, service or management of investments or securities. The views of the executive expressed in the Content are those of the expert and they are not endorsed by, nor do they represent the opinion of In Practise. In Practise makes no representations and accepts no liability for the Content or for any errors, omissions, or inaccuracies will in no way be held liable for any potential or actual violations of laws, including without limitation any securities laws, based on Information sent to you by In Practise.
© 2024 IP 1 Ltd. All rights reserved.
The executive was a Former Product Growth Manager at AppFolio for over 6 years with experience launching new features and product lines with the original founders of APPF.