UK SMB Accounting Software: Xero vs Sage vs Intuit | In Practise

UK SMB Accounting Software: Xero vs Sage vs Intuit

Current VP Sales at FreeAgent & Former VP Sales at Xero

Why is this interview interesting?

  • How Xero successfully drove down customer acquisition costs by focusing on adding value to the accountant channel
  • Why it is harder to move down-market than up-market as software a vendor
  • Comparison of Xero vs Intuit pricing and go-to-market strategy in the UK market
  • How Xero creates value for accountants and helps them make more money
  • How to benchmark at CAC/LTV ratios for fast growing SaaS businesses in the SMB market

Executive Bio

Nick Longden

Current VP Sales at FreeAgent & Former VP Sales at Xero

Nick has over 20 years experience in financial technology and software businesses. He was Xero's first UK Sales Director (2012-14), after which he moved to one of the UK’s largest FTSE 100 tech businesses, Sage, where he served as General Manager of the Sage One product and later as VP of Sales (2014-16). Nick has remained in the accounting software space and is currently VP of Sales at FreeAgent, an online accounting system specifically designed to meet the needs of micro businesses, freelancers and their accountants. Read more

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Interview Transcript

I was looking at the recent Xero numbers. Their [monthly] churn rate, on the latest deck.

When you annualize that, 1.13%, that’s probably about 13% a year, for annualized. On average, you’re looking at about seven to eight years, in terms of the lifetime that the customer is going to stay with you. That’s a pretty sticky customer, in a SaaS business, seven or eight years. To answer your question, in terms of how they did that, first of all, it comes back to having a great product. Xero have got a great product, FreeAgent have got a great product and, ultimately, if your customer is finding value and finding your product easy to use and, in both of those, with financial accounting software, pretty central to the way that they run their business, then making that product into what I call a killer app, which is a business-critical app that a small business owner has to go into and use on almost a daily basis, essentially, that’s how you create the stickiness. You create the stickiness and, therefore, low churn rates, by making sure that you are maximizing customer engagement, by making it a meaningful, central part of their day-to-day business environment.

The first way to get those churn rates is to make a great product and make it as engaging and sticky as possible, as a business-critical app. It then comes down to things like reliability. Obviously, in a SaaS environment, your software and your data is being held in the cloud and that is maintained and the uptime is very much in the control of the service provider, either Xero, or maybe Amazon Web Services, where the data and the software is being hosted. Ultimately, you want to make sure that when you want access to your software and your data that, first of all, it’s reliable access, so the uptime of the service of there. Secondly, and crucially nowadays, that your data is really, really secure, as well. Security and credibility around security is really important, in a SaaS environment.

Then the third element, as well has having a great product and having good uptime and good, reliable service, is then the support tools around that. In terms of minimizing churn, if a customer needs help, we live in an instantaneous environment nowadays. Whether you want to see what’s on TV tonight, or whether you want to see what’s on at the cinema or if you want to find out the football scores, people go their mobile phones. There’s a demand for instantaneous access to knowledge and access to information. Therefore, the way that you can also retain your customers and get those good churn rates, that Xero and FreeAgent have got, it’s about giving access to your customers, to that information, ASAP, on demand almost, so that they feel as if they are getting good service and they feel as though Xero and FreeAgent are good businesses to deal with.

How different is that, really, from what Sage might be offering, for the equivalent customer, in this space?

To be fair to Sage, they are transitioning to that type of service now, but it probably took them a lot longer to do that than it probably should have done. I guess, when you compare how the Sage service used to be and still is, to a certain extent, the access to the updates to the software was, again, very different. I know that, now, things have transitioned in the Sage business, as well, to have cloud-based software, but a lot of their software is still, what I would call, hybrid cloud, which is where you’ve got the data synching in the cloud but, actually, there’s still an implementation of the software, on the local PCs and server. Sage 50cloud is a good example of that. They’re not fully cloud, in my view, in the true and purest sense. But when you look at the way they also used to do their customer help, for example, it used to revolve, very much, around a helpline. You would have a number to call the helpdesk and then a human would answer the phone and try and answer your query. They still offer that, but they offer some of the digital services, as well, such as online knowledge bases and video learning and that type of thing.

They’re definitely transitioning, but they were probably very slow, compared to the true cloud providers, like Xero and FreeAgent. But Sage have had some customers for 10, 12, 15 years. They’ve got a fairly loyal customer base and a lot of their customers are used to phoning that helpline and, therefore, probably aren’t transitioning to more of the digital, online, on demand type services, as quickly as some of the true cloud providers, like Xero.

Then customers get a bit frustrated, because they’re hanging on phone lines, listening to music. To be fair to Sage, they are going through that transition process and they are starting to bring more and more digital, online, on demand services, but in my view, I still believe that they are behind the true cloud players.

Could you just bring that to life for us, a little more, especially on this point of customer service and the experience that I would get with a Xero or with FreeAgent, versus Sage, if I’m trying to solve a problem, today.

There’s various elements and various channels to customer service or help, as I call it. I guess the way that FreeAgent and Xero do it is very much by having online knowledge bases. You can go to the customer extranet areas of their websites and type in what problem you are having and it will return knowledge base articles to try and answer the question for you, in that manner. Obviously, using webchat technology, as well, is quite common now, certainly for FreeAgent. We have also got something that we call Ruby the Robot. Ruby the Robot is actually a webchat where you type your issue in and then it goes off and searches the knowledge base and returns the information for you, as opposed to having to search the knowledge base yourself.

So there’s that type of technology which is available, certainly at FreeAgent and Xero. At FreeAgent, we recognize that certain customers still want to talk to a human and we are one of the few providers that offers, in the cloud space, a telephone helpline, as well. Sometimes, you do need that as a backup, to be able to service the more complex customer requirements. It’s not that the telephone is dead, but it’s just not people’s first choice of getting customer help and answering their queries.

Again, some of those features are available to Sage’s customers. Webchat, for example, and access to knowledge base articles. I think that what most Sage customers would probably do is to default to the telephone service first and then, potentially use the other elements as a backup, as opposed to Xero and FreeAgent customers going the digital route first and then using the telephone as a backup. It comes back to that philosophy and psychology of your users.

Having set the scene, with some fundamentals on the SaaS business models and the industry, as a way to get into the next part of our conversation on accounting software in the SMB space, in the UK, could we start with looking at the recent Xero numbers, where over the last year, in the UK, they’ve grown their revenue by over 50%. Could we get into that story and how exactly, in your view, they’ve done that, in what is a reasonably mature market?

You say it’s a mature market. Actually, when you look at profile of the market, there’s about 5.7 million businesses in the UK, according to ONS. It may not be the exact number, but it’s round about that figure. I guess, when Xero entered the market, back in the UK, in about 2009, but they probably didn’t make any major headway into the market until probably 2012. That was still only eight years ago. At that stage, of the 5.7 million businesses in the UK, Sage had a huge amount of market share, particularly in those SMBs, SMEs, which make up the majority of those 5.7 million businesses. Probably only about one million of those 5.7 million, back in 2012, had actually used computerized financial accounting systems and, predominantly, it was the Sage systems, at that point.

At that time, it wasn’t a particularly mature market. There were probably about 4.5 to 4.7 million businesses that were using Excel spreadsheets and paper-based systems which, at the end of the year, they would send to an accountant – the old, what I call, shoeboxes of receipts and bank statements – and the accountant would have done the majority of the work, to product the end-of-year tax return and the end-of-year company accounts. It wasn’t actually that much of a mature market, when Xero entered it. It was probably quite a closed market, in terms of the fact that Sage was the incumbent provider and were the dominant player in the UK. In terms of making that initial headway, the way that Xero did it was by having a great product; having a different product, in the respect that the data was in the cloud. It was very much a true cloud system which, initially, was probably a bit of an issue, back in 2012, even. It was only eight years ago but now we think about our data and software in the cloud as normal.

Back then, it wasn’t that normal and people still had a lot of concerns about data security; accountants, in particular. The accountancy profession had a lot of issues around data security. At Xero, what we had to do was, really, to educate the market. We had to educate the market about the benefits of having the accounting software and the business data in the cloud, both for the benefit of the end-user businesses, but also to the accountants themselves. What Xero were very, very good at was that they identified, back in 2012, that actually, the accountants were crucial to their growth. Accountants are seen as trusted advisors to the end-user businesses and, therefore, if Xero got the accountants on-side, and got the accountants educated and knowledgeable about the benefits of having financial accounting systems in the cloud, then they would influence their customers and, essentially, create a sales channel or a wider sales team, of all the accountancy practices in the UK, to sell the virtues of Xero, on Xero’s behalf. That, essentially, was pretty much the model.

That was a very different model to the likes of Intuit, for example, or Sage, to a lesser extent, in terms of the fact that they had a much more direct model. They were selling direct to end users, which meant that the cost to acquire those end users was relatively high, because it depends on brand awareness, advertising, even direct marketing, at that point, because you’re actually going to each one of the end users and trying to get them to buy your software.

Xero took a very different approach and they got the accountants on-side and, essentially, got the accountants selling and recommending Xero, on behalf of Xero. Those two elements were pretty key to Xero’s success, initially, in the UK. First of all, having a great product and, secondly, having a very good strategy of how to get to those end-user businesses, via the accountants. Those were probably the two crucial bits of early strategy in the UK, that Xero had and they’ve built their current success on the back of those two things.

They’re now eating into the installed bases of the incumbent, to a meaningful degree?

Yes, absolutely. Yes, they are eating into the incumbent user base of Sage, in particular, but also, they have had a large amount of success in attacking that white space market, as I call it. Those 4.5 million businesses who were not using Sage; they were using Excel or they were using paper-based systems. That was the low-hanging fruit. The other thing which also helped Xero to attack that white space, was actually the pricing strategy under a SaaS-based model. Traditionally, Sage would have sold a product on a perpetual license base, for an initial price of anything from £400 upwards which, for a small business, is not an insignificant investment. For Sage 50, £400 was the entry point. Xero came in and said, well, we’re not going to charge a perpetual license; you just have to pay £30 per month. Therefore, that lowered the price barrier of entry, for a lot of small businesses in the UK which, again, was a differentiator between them and Sage, at the time, back in 2012.

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