[Growth Study] Slack – 30% CR and 3M DAU – How Slack Became the Biggest Success Story in Tech
This is a syndicated article which I wrote for Single Grain.
"As hard as it was to convince people to start using it, once they started they almost never stopped" - Stewart Butterfield, CEO and Founder of Slack
Slack has already entered Silicon Valley’s hall of fame as the fastest growing business app.
From its public launch in February of 2014, Slack’s accomplishments include:
- Accumulating 8 Million Daily Active Users (DAU)
- 3 Million of those are paid users
- The highest conversion rate among Freemium Software products - 30%
- The app is used by 43% of Fortune 100 companies
- Their latest valuation in August 2018 showed that Slack stands at $7.1 Billion Dollars
These numbers are just mind-boggling; Slack went from $0 to $7 billion... in less than five years.
It’s even more impressive considering that the Slack app was born out of previously failed businesses.
Prologue - Slack’s Backstory
Chapter 1: Brotherhood and Perfect Timing
Chapter 2: Execute the Perfect Launch
Chapter 3: Brand is Everything
Chapter 4: Customer Experience as the North Star
Chapter 5: An Offer You Can’t Refuse
Chapter 6: The Blueprint for Multi-Billion Dollar Company
Chapter 7: Slack’s Friends and Family - Integrations and Partnerships
Chapter 8: Future-proofing the Company and the Product
Every success story has done three things in their lifetime:
Product-market fit. “Right idea, right time”
Rapid growth. Scaling with hyperspeed.
Reinforcement. A built-to-last model.
In this growth study, we’ll look at the story of Slack, its beginning and underlying strategy for world domination, and how they built a platform that’s transforming office communication.
Founder and CEO Stewart Butterfield is no stranger to fast-growing apps; he built Flickr about 10 years before starting Slack. But let’s dig deeper...
Butterfield, born and raised in rural area in British Columbia, hadn’t been exposed to technology until he went to university the late 1990’s, he became fascinated by the school’s Unix machine, and how it could build something out of lines of code.
After escaping the dot-com bubble in 2000 with $35,000 severance pay from his ecommerce job, he started building a web-based massively multiplayer game called Neverending. With rudimentary graphics and a small but passionate community, Stewart fueled his passion for design and communication.
The game was impossible to fund and thus difficult to scale; however, the side effect of building the game was that the small team built a technology that let users tag images with other users, far before Facebook and Instagram offered that ability.
Meanwhile, Stewart’s $35K was dwindling,and the game was was approaching its inevitable decline. Pressured by depleting finances, Stewart and his fellow tech-obsessed friends iterated to utilize the core technology that made the game unique — image sharing and tagging capabilities.
He then started Flickr , and help from Google, they started getting users with a rapid pace. At the time Google had just bought Blogger - a CMS platform that allowed anyone create a website. However, you because you couldn’t store images on Blogger, Google redirected users to save their images on Flickr.
The Flickr team wasn’t profitable — it had astronomical server storage costs — however it attracted the attention the Silicon Valley giants: Yahoo and Google.
Yahoo! offered Flickr team $20M. The team of eight became millionaires overnight, but instead of maintaining their culture rapid iteration and agile workplace, the 11,000-employee Yahoo! slowed down the startup-style decision-making process.
After three years, they were fully vested, and Stewart took his core employees and returned to his initial project — another web-based multiplayer game called Glitch.
As they were now known for Flickr’s success, the team had an easier time finding investment, They raised $17M which was used for new hires, mostly for graphic animators. Flickr’s success meant that he game attracted a lot of users.
But there was one major problem. The problem that kills the most startups — a leaky bucket.
Even though users found the game and tried it out, 99% of them didn’t return because it was too obscure and abstract. Much to Stewart’s dismay, this project was nearing its end.
Stewart made the hard decision to pull the plug in 2012. Devastated, Butterfield helped every one of 37 employees get a new job.
But he’d find success soon...
Chapter 1: Brotherhood and Perfect Timing
Objectively speaking from a business perspective, Glitch was a disaster. However, the team had developed an internal communication system that made them incredibly productive.
The platform was built on a concept of channels which allowed team members to chat directly or within the channel. It stored all communication. It was an inversion of the typical inter-office communication: email.
The thinking was that in email, team members don’t have the context from the stored communication; 99% of messages aren’t visible unless you’re cc-ed.
The Glitch team didn’t realize how useful the communication system they built was until they shut down the company. It was much better than the typical email-based communication, and they never wanted to work without a system like that again.
Maybe, just maybe, other people would like it too.
After Glitch shut down, Stewart was left with his core people, the same people who were with him from the Flickr and game development days. By now, they had been working together for close to 10 years, and loved making products together.
The hard times had connected the team even further.
Weeks after Glitch closed, Stewart and his team started working on the Slack app. They rebuilt the entire internal communication system within a couple of months.
Solving the Dreaded Inbox Problem
Internal communication was a problem for most companies, even though they weren’t necessarily aware of it.
With more and more software startups rapidly scaling, they realized that internal communication encountered problems when a single-digit team grew to 20, 50, 100+ people in a year.joining the startup, they inevitably encounter problem where a single-digit team turned into 20, 50 or 100+ people company in a year.
Slack was at the right place at the right time.
They weren’t the first new communication system:apps like Yammer, Campfire, and HipChat already had small but loyal user bases.
Seeing a trend, copycats were popping up left and right.
In order to succeed, Slack needed to solve the communication problem better than the others.
Working in their favor was the ridiculously huge Total Addressable Market (TAM) — companies from tiny startups to massive enterprise businesses needed a tool like this.
The core features and capabilities of Slack were: :
- Contextually relevant and segmented communications, including persistent chat, direct messaging, as well as voice and video calls within and between teams.
- Synchronized communication and collaboration across multiple devices and platforms.
- Integration with third-party apps, legacy enterprise software, and custom-built apps and chatbots for Slack.
- Customizable notifications and advanced search across Slack's real estate.
While the TAM is virtually the same for all existing rivals, Slack differentiated itself through their fun brand, ease of use, customer-centricity... Combining that with a brilliant product launch, Slack had the edge in market share.
Why Yammer Failed
Microsoft’s Yammer was essentially solving the same problems as Slack, but their approach was off. While 80% of the client’s team got on board to use it, senior employees weren’t quick to try it out.
You also had to use Microsoft Office 365 to access Yammer. Many potential users utilized Google Docs (especially for collaborative use). Microsoft Office 365 requires users to pay and commit, while Slack and Google Drive are free.
Slack was able to move past reluctance avoided the problem with aby having a fun interface (Chapter 4), generous freemium model (Chapter 5) and an easy-to-use platform simplicity use, so everyone from more flexible team members to senior employees could see the benefit in the same day (Chapter 6).
The Importance of Emerging Market
Slack’s initial team consisted of four core members: Stewart Butterfield, Eric Costello, Cal Henderson and Serguei Mourachov.
The team communication system developed during their tenures at Flickr and Glitch made them far more productive. They noticed the productivity with the rest of the company members.
Everyone working with the core team realized how effective their system was, and when teams moved on to other companies, they quickly realized how much inefficiency the proto-Slack was solving.
The core team knew they were onto something; they had the market validation they needed from their own team.
Slack Question: One of the Slack reasons for success was the tight-knit community of 4 founders? Does this example of trust and love for work translate to all employees and in what way?
KEY TAKEAWAY #1 — Emerging markets are your friends.
Emerging markets are a great place to launch a new product, especially when you already have market validation. Partner with the people who are the best at what they do and able to handle the pressure of a rapidly-changing startup. Competition is a good sign that you’re on the right track, but launching a product in a competitive market means that you have to build a super product and serve your consumer base better.
Chapter 2: Execute the Perfect Launch
If you’re running a startup, the odds are against you.
You need to find a pain point, actually solve the issue, and gain clients who trust you.
If your product hypothesis isn’t right, you have to iterate while you still have a financial runway.
Slack knew they had the solution to a major business pain point. Because of their prior success, the team was able to get venture capital so they could focus on a strategic and exceptional product launch.
Instead of ‘growth hacks,’ the Slack team combined the efforts of product design agency MetaLab, the reputation they had built from Flickr’s success, and PR agencies that came up with Slack’s unique hook: “The Email Killer”.
They launched a ‘preview version’ of Slack so the team could:
- Fix major bugs and errors
- Determine and identify the features and benefits that resonated with the market
- Galvanized the initial user-base to advocate Slack by word-of-mouth
Once they fixed any issues, they were ready to bring Slack out with a strong product launch. Imagine how it would be if Tesla or Apple revealed a semi-tested product.
The Slack’s hook - Killer of Email in Time’s article | Source: Time.com
Slack’s intention wasn’t to replace email.
As Butterfield says: “Email has many benefits, it's the lowest common denominator for official communications. But it's a terrible way to manage internal communications."
"Email will be the cockroach of the Internet, I think we've got another 30 or 40 years of email left” — Stewart Butterfield
Preview version gave Slack a chance to test core features at the same time as building the relationship with the select few. Note that Slack intentionally haven’t named the pre-public version “beta” version. There is a massive difference in dynamic and perception from the user standpoint; in beta, they’re there to test out things so they can help the company. But if the users are in “preview” camp, they are one of the elite few who get to use the product before anyone else and enjoy its privileges of being first.
Hiring an outside company to build a brand might be unique to Slack. Slack’s first marketing hire, Bill Macaitis step into the role of CMO in November 2014, which means Slack completely relied on the third party agency to deliver the whole look and feel of the brand. Outsourcing the whole department and relying on someone else delivering the whole look is a journey of trust and belief. Luckily for Slack, it paid of in the best possible way.
Slack’s preview release, August 2013 | Source: web.archive.org
They were confident to release it to the public.
These took months of careful planning and synchronizing across the channels.
As soon as the product hit the market, it went viral.
Here are some assets Slack acquired before they launched:
- Collected testimonials from known companies and displayed them on the landing page
- Use Twitter to show off the “Wall of Love” - tweets of users who sang praise to Slack’s
- Use the PR firm to connect with most of the relevant tech online (and offline) publishers:
- Fast Company - Flick Co-founders Launch Slack, An Email Killer
- TechCrunch - Slack, Flickr Co-Founder Butterfield’s Business Collaboration App, Exits Beta & Goes Freemium (February 12, 2014)
- The Verge - Slack is killing email (August 12, 2014)
- VentureBeat - Flickr co-founder launches ’email killer’ Slack to the world (February 12, 2014)
- Inc.com — Why Slack is Killing Email Once And For All (November 11, 2015)
Slack tested out the product-market fit and figure out what is their way to attract new users with one giant swoop. They used multiple Pr agencies with a hook that immediately attracts the user. PR agencies are usually expensive, but Slack thought it’s the perfect way to get as much exposure in a short time. You can do this manually by pitching to reporters manually. This would take a long time since you have to build a relationship but it will support your launch greatly.
The building of social proof created a cluster of social credit. Using the “email killer” headline hook from the industry-recognized publishers such as Verge, TechCrunch and VentureBeat brought in new unique traffic while the Twitter’s Wall of Love shoved the trust of peers.
|Slack’s Wall of Love
Whenever a Twitter account post or retweets someone else tweets it appears on their timeline. Slack created some sort of repository of all positive tweets whenever they were mentioned. This created one giant wall of positivity and love. Slack named it “Wall of Love” — it’s a separate Twitter account that stands on its containing everything nice that is being said about it.
Slack combined it with a traditional marketing channel — a print ad in Wall Street Journal.
Slack’s whole page ad in WSJ magazine. | Source: blog.onging.com
Why it works:
Keep in mind that most of the audience were companies from Silicon Valley — from software industries where there’s a lot of conversation happening on Twitter.
Deeper into the Brand Core
Great brands are built on top of solid foundations. Solid team with proven track record - check. Clear value proposition and demonstrated product/market fit - check. Company culture with customer centrism and solid brand - let’s unpack this. If we borrow the term MVB (Minimal Viable Branding) we can deconstruct Slack’s brand to individual elements.
MVB is the concept adopted by Scott Kraft, Denise Lee Yon, Tino Chow, and Madeline Gerber to construct an image of the brand that’s both recognizable to the public and sets the homestead for company culture and how they communicate in-house and outbound.
According to Kraft the MVB of consists of:
- Brand Pillars — one to three one-word adjectives that represent your company
- Audience needs — what are the audience takeaways
- Functional needs — materialized benefits
- Emotional needs — how the audience perceive the brand on an emotional level
- Personality of the brand
- The promise
- The company’s vision
It serves as an immediate blueprint for the product that conveys the future promise the company will be delivering.
Source: “own source adapted by Scott Kraft’s MVB talk at 500 Distro”
SlackAccording to Kraft, brand’s personality consists of brand pillars + Top customer audience + their top 3 needs + top 3 emotional benefits;
- Brand Pillars: Fun, Inclusive, Connected
- Customer Audience: Employees having issues communicating within the company
- Top needs: More effective system to reach out to the rest of the team, faster feedback loop, just-in-time information
- Emotional benefits: Makes the employees feel part of the team, relevant by closely following the evolving project, productive
= Slack - The fun and productive team chat
- Audience: people inside the company
- Functional Needs: one universal system for communicating above and across to the rest of the team
- Emotional Benefits: social inclusion, light-hearted working environment
When you use slack you will feel more connected because of the freedom to reach your colleague
If we try to describe Slack as a brand by the other three elements of the MVB:
- Personality: fun, connected, diverse
- Promise: to connect people in-house with a simple yet powerful system for team communication
- Vision: Make work happen
Whenever you see Slack content, you will be able to connect these values and elements to their brand. As you are going to discover further - this mindset is ingrained to every member of the company across the board.
Slack Question: The launch of Slack back in February 2014 was a carefully planned marketing campaign with the use of PR agencies. Now that Slack employs 1,000+ workers, how much marketing is planned in-house vs hired work?
KEY TAKEAWAY #2 — Controversy.
Don’t neglect the power of traditional marketing. Build the hype and use the "hook" message to promote article re-sharing. Slack’s is the Email Killer - a controversial statement which addresses the burning pain at the same time. What will be yours?
Chapter 3 - Brand is Everything
This is the holy grail of success. Slack hired a mega-successful design firm MetaLab to turn their early prototype into a polished product.
Design and UX
Enterprise software is notorious for being big, boring and lifeless. If you compare HipChat (Slack’s main competitor), you’ll have an easy time picking the one that looks more fun to use.
Andrew Wilkinson from MetaLab said “We gave it the color scheme of a video game,
not an enterprise collaboration product.”
Early design iterations for Slack | Source: @awilkinson
With an easily recognizable design that was equally fun and easy to use, Slack created a stark contrast against the competition.
In 2018, 133 million visitors to the website per month
Different kind of marketing:
There’s content that still fills each role in Top, Middle and Bottom phase of the customer’s journey, however instead of just written. Slack opted in with visual and audio content.
Their Animals product video has been insanely popular.
|The “Animals!” project cost the company $1 million. The directors Alan Smith and Adam Foulkes experience the smooth onboarding process as Slack users did. They were able to translate and deliver the correct brand message in the video.
The animals in the video or as diverse they could be (lion, dolphin, rabbit, sloth, owl, beaver,..) but they are able to complete a complex project with effective communication.
Don’t forget to watch the blooper reel with the beatboxing prawn.
Slack’s first podcast — The Variety Pack, published by Pacific Content launched in May 2015. By the end of the year, there were 17 episodes and more than 3 million listens. The Pacific Content team worked with Slack to produce 28 episodes of Slack Variety Pack. The bi-weekly format with half-hour episodes appeals to the Slack audience.
The themes of the podcast were not specific to Slack as a product however they reflected the interests of Slack users: career change, lifestyle at work, future of jobs etc… The podcasts were also light-hearted reflecting Slack’s commitment to fun.
“Although podcasts are becoming more mainstream, if you’re a die-hard listener of podcasts, there’s a good chance you’re also an early adopter, so it was a way for us to help spread the word about Slack.” — Bill Macaitis, former CMO of Slack
Slack worked closely with Pacific Content broadcaster Steve Pratt, giving feedback for each episode. The focus was on telling engaging stories with small intertwined slogans like “Slack: Love what you do” and “Slack: Making work less work-y”. The podcast reached the wider audience with a very soft sell.
“A brand is the sum total of all experiences a customer has with the company” and Slack relies heavily to keep the word-of-mouth going.
Stewart Butterfield adds: “Every customer interaction is a marketing opportunity. If you go above and beyond on the customer service side, people are much more likely to recommend you.”
Their famous Wall of Love twitter account collects and displays all the complimentary things people Tweet about them https://twitter.com/SlackLoveTweets
Localization over Translation
Personalization is not a nice-to-have any more; it’s mandatory in today’s hyper-segmented marketplace to communicate with users.
On top of customer satisfaction metric NPS (Net Promoter Score) data, Slack’s Global Team marketers look at the growth and activation rates of new customers teams. It’s important that they get a sense of whether people signing up for Slack continue to use it.
With such a wide addressable market, segmenting your approach and creating a solid plan to conquer new customer lands efficiently.
For that reason, Slack chooses a localized approach instead of one broad message for the majority of the markets.
Chapter 4 - Customer Experience as the North Star
“At the end of the day, that’s what fuels our organic growth rates – Slack does what it says, is delightful to use, and in return, people tell others about it.” - Kelly Watkins, Global Marketing at Slack
Slack was able to enjoy hyper-growth without marketing staff.
“Its growth rate is unheard of. Both Slack’s daily user count and its paid seat count are up 3.5X in just a year.” — Josh Constine, Techcrunch
As mentioned before, Bill Macaitis - formerly the CMO at Zendesk and Senior VP at Salesforce was brought on in November 2014. That was 9 months after the public release. Macaitis was an employee number 50 which tells that Slack did most of the branding and marketing heavy reps before. Slack had grown big even without a marketing team — Macaitis was the first hire as an employee #50 and they already had the hockey stick curve of new users.
Instead of relying on growth hacks, paid marketing channels and short term tactics, Bill Macaitis focused on only one thing -- creating the customer experience people love.
Andrew Chen, former VP of Growth at Uber and a marketing leader, talks about the law of shitty click-throughs - it’s the inescapable point every company arrives to. A marketing channel that worked like gangbusters in the past will stop bringing the same positive ROI over time. Or if we say it differently - every marketing channel has an expiration date.
James Currier’s slide about marketing channel rises and decay of effectiveness.
However, there is an exception -- word-of-mouth will never stop being an effective marketing tactic
If you can achieve a point where people are consistently recommending you to friends and colleagues,, you’re in the path of real growth.
Once people tried Slack, they had to tell everyone else. An software engineer in the company who adopted the product had to tell his friend how amazing Slack is, while they were fetching Starbucks coffee.
“Unlike almost any enterprise software ever, people would talk about it. Like, they would be in line at the coffee shop, and they would say, oh, my God, you've got to start using Slack. It's amazing. It changed my life. And they would post to Twitter and say, like, I - you know, I recommend it. And that - you know, no one ever says that about the software that they have to use at work.” — Stewart Butterfield on Slack’s word-of-mouth effectiveness
YCombinator CEO Sam Altman’s mantra is ‘customer love is all you need. A hundred people who love your product is better than a million people who kind of like it.’
Hubspot Founder Dharmesh Shah would never trade short-term gratification over the long-term benefit. He says: “Manically chasing growth at the expense of customer goodwill mortgages the future.”
Slack embraced that philosophy:
- The onboarding is fast and frictionless: It takes just three clicks to start using Slack.
- Fair pricing: If you stop using Slack, they will return the credits back to you
- The legal, support and customer success. Every new employee goes through a 9 week training process so they settle in, adapt the company culture and learn how to communicate in Slack’s way.
Slack Questions (branding): User experience and focus on brand made Slack stand out? How does Slack train a new hire to embody the brand values and communicates the product properly?
KEY TAKEAWAY #3 — Dare to be different.
Dare to be different, but never over the cost of functionality and the best customer experience. Word of mouth = growth.
Chapter 5: An Offer You Can’t Refuse
Once a product hits a hot market growth is contingent on continuing to stoke the fire..
Becoming a viral product depends on:
- Your product becoming a part of users’ daily or regular routine
- Making it easy to share and get more people on the platform.
Slack has an amazing freemium option and easy-to-understand (read: transparent) pricing.
Right from the start, you can use all the available features Slack has to offer, such as integration, document sharing, built-in features and more.
The limitations of a free account don’t affect the user as they start using it; it’s only once Slack becomes an integral part of their workflow does it make sense to upgrade. By then you’re already hooked!
The limitations of a free account:
- The number of searchable messages are locked at 10K
- You’re only able to connect 10 third-party or custom integrations
- A modest file storage: 5 GB total
This is done intentionally: Slack wants you to use their products until the ease of communication and functionality is a daily part of your life. and,
Once you hit a point where you want more storage, or more integrations, you upgrade to a paid model. By then the product is integrated into your workflow and life.
Slack’s conversion from free trial to paid version is 30%, showing that giving away value pays off in the long run. Slack is an absolute outlier with this conversion percentage. According to Jason Cohen from The Fader: “A really good conversion rate for free-to-paid is 4%, like Dropbox. Awesome for them, but normal rates are more like 1%, and that’s if users are reasonably active.”
The only that comes close is Spotify at 26.6% conversion rate, while Dropbox and Evernote are far below at 4.1% and 4%.
An important notion is also the fact that Slack is a tool for connecting teams. As soon as you enter the desktop app you’re prompted to invite your team members.
Inviting team members is one of the steps of the onboarding journey | Source: Slack.com
Even inside the app, the invitation CTA is highlighted above everything else. | Source: Slack’s Desktop App
- Slack asks you to invite team members right of the bat.
- It makes it easy to share the invitation link.
- You can invite users through unique URL that can be shared through email, social media or on any website.
In the words of Bill Macaitis - “optimize everything for word of mouth”.
Move the Bar of Success from Activation to Referral
The whole Slack brand was built upon the notion of a product people love. And if people love something they will tell their friends, colleagues and peers about it.
CMO Bill Macaitis moved the bar of success from converting a user to a paid account to convincing a user to recommend Slack further. This is much harder to achieve. The paid conversation is more of a short term goal — it’s important but it pales to a comparison of achieving a massive network effect.
Network effect is a condition when every new user who joins makes the product stronger for everyone. Each one who hears about it or uses it to organize outside of work becomes more likely to infect their whole company with the Slack infection.
It does explain why insisting on NPS and CSAT (Customer Satisfaction) scores as the main metric broad the biggest success. It’s the perfect optimization for word-of-mouth.
The perfect example is Slack’s pricing model.
If you were using Slack on a paid account and one of your team members hasn’t logged in within a 10-day active window, Slack refunded the money and credits back to an account.
This is unusual for any company to do.
But Slack had to ask itself what is the best for themselves as a brand and the customer.
Does the pricing model align with brand customer centricity?
Does it surprise the user in positive way? It does since the user doesn’t to get unused funds sent back to them.
Is it more likely that a customer will recommend the product further. Unusual things are often shared more.
Or let’s think about the frictionless trial. All features are unlocked from the start. You can have a team of 200 users on a freemium tier model.
If you ask yourself those three questions you’ll have the same answer to each one of them.
Deeper in the Customer Success
In the book From Impossible to Inevitable Aaron Ross wrote that customer success is the core growth driver and is worth 5x more important than sales.
It’s for the same reason that Macaitis, coming from Zendesk, where he focused on CSAT scores made customer success a top priority.
In Power of Habit, author Charles Duhigg explains the concept of Keystone habits — they’re beliefs and routines that someone, or in this case company, holds in the highest regards. Achieving the number on most important goal percolates to all the other good stuff.
Just like keeping a daily exercise helps individuals become more organized, having more energy to be more productive and start watching your diet, customer success directly affects retention, drives referrals, and help capture positive case studies.
Slack Question (NPS): How does Slack maintain the customer-centric strategy and the quality of support besides iterating due to CSAT survey test scores?
KEY TAKEAWAY #4 — Build your community.
Give out so much value that your users can’t live without you. Make a product and experience amazing enough that they’ll want to tell all their friends about you. Make it easy for people to begin using your product AND get friends and colleagues on it. Competitors might be able to clone basic features, but they can’t clone the community.
Chapter 6: The Recipe for a Multi-Billion Dollar Company
When Great Product Isn’t Enough
Having an amazing problem is not a ticket to riches. Actually, it’s a prerequisite for growth. But there are two ways you can grow - slow, hard growth where you feel like pushing a boulder uphill.
Or the easy way, where you just feel like you’re guiding the rolling cart downhill.
But there are terrible products as well which achieved amazing growth. Brian Balfour (former VP of Growth at Hubspot) explains you need 4 pieces of the puzzle for growing to $100 million and beyond Annual Recurring Revenue (ARR).
- Market/Product Fit (already covered)
- Product/Channel Fit
- Channel/Model Fit
- Model/Market Fit
The companies who can make these 4 frameworks to align are the ones where the growth happens naturally – like a snowball.
The Market/Product Fit
While the great product is necessary you still need to find the market. Finding a solution before fixing a problem is just like putting a cart in front of the horse.
We should be thinking market first, then the product.
[How about Steve Blanks - get out of the building idea]
For instance, in 2016 and 2017 there was a big hype about virtual reality. It sounded new and exciting and numerous startups and companies tried to build something around it.
Or in the last couple of years, cryptocurrencies and blockchain has been popping out in every inline publishing magazine. Yet, we still don’t have a sticky solution - a tangible clear way those technologies are fixing the problem.
It’s because it doesn’t solve any major burning pain.
Slack’s team communication has a very clear value proposition - it reduces the time effort for team communication so everyone can get the info just-in-time. Thus working feels more smooth and productive.
Let’s look at ti in a visual representation
|Category:||Project Management, Team Communication||Core Value Prop:||Get the information from your coworkers right when you need it|
|Who:||Department heads and everyone else||Hook:||The Email Killer|
|Problems:||Digging through archives, ineffective email, slow communication||Time to Value:||Create Account -> Invite team members -> Send message|
|Motivations:||Productivity, connectedness||Stickiness:||Growing archive of all communications, integrated tools, fun UI/UX, social connectedness to the team|
The product market fit has to be proven with a combination of qualitative and quantitative measurements.
Slack’s Northstar Metric has always been NPS which is one of the best qualitative predictors. If your product solves the problem and it’s made in a way people love using it, then they should recommend it further.
At the same time on the quantitative side you have to pay attention to two things: direct traffic and flat retention.
Flat Retention Curve is the key to growth| Source: Medium.com
Slack figured both things out. The product is a quicksand, the more you use it the more you depend on it. Every new person that joins the company has to use it as well.
QUESTION: Can Slack share their retention information?
Product Channel Fit
What most startups fail to understand is that the product and channel are connected. We shouldn’t treat them as silos. They are not separate entities but connected pieces that correspond with each other.
But product are built to take advantage of a specific channel.
Channels do not mold to products.
We can’t define the rules of the channels. Google defines what gets ranked in SEO and shown as search results. Facebook defines what gets shown in the feed. Gmail defines what gets in the spam and what into the promo tab.
What you need to do, you have to mold it into one of these channels as seamlessly as possible.
How Slack did it.
Slack’s product has an amazingly quick time to value which doesn’t only target an individual but a whole team.
Secondly, it’s got a broad value proposition - everyone in the team gets the the same similar benefit of increased productivity and shorter times of getting information.
However, Slack managed to get all of those channels to percolate down to the holy grail of channels - word of mouth.
Peter Thiel, one of Silicon Valley’s most known venture capitalist’s said:
The Power Law of Distribution tells us that 70% or more of all acquisitions will come from one source (or one marketing channel).
One quick look Slack traffic sources will tell you what this is.
It’s not just virality but the combination of brand and WOM. It’s the Direct channel. This means that Slack brand is so well known, most of the users are coming on the website by directly typing s-l-a-c-k dotcom in the browser. Every company wishes for this kind of channel distribution.
You probably heard of Pareto’s Law (also known as 20/80 rule). 20% of effort gets 80% of results.
The Power Law is something similar however Peter Thiel used it in a quote:
"We Don't Live In A Normal World; We Live Under A Power Law."
This is explained by the Product Channel fit. Any business use one or several channels to get users or revenue. In the book “Traction” by Gabriel Weinberg and Justin Mares you will find 19 marketing channels you can explore.
But it’s unusual to expect the traffic or users are going to be distributed evenly across different channels. The companies that really makes it work find one channel that brings in 70% or more users from ONE channel.
Some examples of companies that made it work:
Virality - DropBox storage referral program and Harry’s shaving waiting list
SEO - HubSpot and Neil Patel who covered almost every piece of marketing with content
User Generated Content (UGC) - Reddit, TripAdvisor, Twitter, Instagram
Sponsored Podcasts - Website builder Squarespace and Casper mattresses are known to sponsor podcast hosts who plug their plug their products
Channel-Model fitness defines the relation of your pricing model and your channel. It should answer how you charge your customers and how much are Average Annual Revenue Per User (AARPU) are you receiving.
To determine a good business we need to look at the relation between the ARPU revenue and Customer Acquisition Cost (CAC).
On one end you have low ARPU and low CAC sections - these are channels that monetize quickly but in lower amounts. Think of Facebook or Mailchimp.
On the other side, you have high ARPU and higher CACs. These are companies like Palantir (Palantir sells software to government agencies and corporations).
These companies pricing model has to be congruent with the channel. According to Brian Balfour, the worst thing to be is somewhere in the middle. This doesn’t mean it won’t work but it might be harder to execute.
How about Product Tiering? Bigger product with a variety of services can exists across the ARPU <> CAC Spectrum? If you look at LinkedIn, they have a product offers on low and high end of the spectrum.
What about Slack?
We defined the Slack as a product that uses virality to grow. It’s freemium model allows it to onboard and value-lock the whole team quickly.
But most of the users convert to paid ones in the first 3 months. This places Slack near left of the middle of the Spectrum
On the Product tier level, Slack has benefitted from clear pricing. But they also have a solution on the Higher end of the Spectrum — Slack Enterprise Grid. At SEG companies manage multiple workspaces with increased security features.
Model Market Fit
For some companies, growth can feel like slow lumbering mammoth, where you need to put a ton of effort to get it moving. For others, growth is a smooth natural process — it feels like growth just happens itself. Slack is definitely one of the latter companies.
Why is that?
Because the road to the 100M+ annual revenu is different depending on the pricing model and the market. Venture capital investor, Christoph Janz from Point Nine Capital developed the pricing matrix and named the different product by animals they represent:
- Elephants - are large enterprise products worth 6 or more figures. You need 10 client to have your first million
- Moose - are upper market B2B products where an account is worth around 10k. You would need to get a hundred of these customers to get to the first million. Example: Hubspot
- Rabbits - the majority of SaaS tools and software priced between $49 to $249 per month. Example: Most of the email managers like Mailchimp.
- Mice - A small B2C tools worth a couple of dollars per year. Think of Shopify subscription or New Yorker paid content.
- Flies - Small B2C tools only worth a about $100 per year. These are companies that get a tiny fraction of revenue. Example: Buzzfeed.
Depending where you place in the Animal Pricing Matrix dedicates the market. Are you going to hunt the big corporate/enterprise deals? You only need a couple of them.
Slack default product is hunting rabbits and deer elks - small (2-20) to medium sized teams (up to 150) where they can quickly earn a decent revenue. Since they earn per user the price stack up quite fast depending on the size.
For that reason, Slack held a record of earning one million ARR (annual recurring revenue) every 11 days. That’s impressive especially, because it was in the first year of the launch.
If we’d drawn a line across the animals we’d get a Model Market Fit Threshold. On the the line and on the right we’d still have a Model Market Fit, while everything below we’d be failing the algorithm for high-revenue company.
How do you calculate your Threshold. Write this down.
Start with the total customer in the market which you’ve already done at the Market Product Fit stage. If the customer size feels to small, you can cast a wider net, however you’d need to check the Market Product Fit to see you’re still covering the customers according to your criteria.
Then calculate how much your customers are willing to pay. You have to be above the Market Fit Threshold. If your product sits below you can raise the prices but make sure the Product Model Fit supports positive ROI.
Lastly think about how much % of the market you can capture. This is the hardest metric to calculate since it’s tough to predict. Brian Balfour suggest 10% as a rule of thumb as a starting point.
Summary of the all 4 frameworks and how it applies to Slack
Let’s put Slack in the table and review the frameworks to see if the hypothesis holds true.
|Wide (SMBs and MidMarket), Enterprise||Low (Freemium) to Med ACV||Virality|
Slack is valuated at $5.1 Billion.
During the years it has evolved to cover a larger piece of the market with different pricing models but for the sake of this equation let’s look at the most common one.
Product - Slack is a team communication tool that solves an internal communication within the team. It has a clear value proposition and solves a major pain. It’s simple to use, however with a plethora of apps and integrations it becomes a valuable piece in the company’s stack.
Market - Their most common client is a software company which starts in small numbers of emplyees (between 5 to 20) and quickly swells up to a hundred or more if it’s successful.
Model - Pricing is straightforward. It’s based per active members. If a company of 20 takes a standard package, it costs them $1,920 per year. For every new member that joins the company, Slack earns another $96 towards their ARPU. This puts them in medium ARR (annual recurring revenue).
Channel is viral. Word-of-mouth is accelerated by strong brand high customer satisfaction scores. Every user that joins Slack has the ability to pull another person as well. Since the product is simple and doesn’t require much setup, the viral channel works amazingly well.
There are roughly 20k tech startups in the Bay Area. 10% of 20k is 2000.
2000 companies with 20 members gets Slack an Annual Contract Value (ACV) of $4M.
But Slack is not just targeting software companies, it caters to regular brick and mortar business, offices, government companies and more. The Total Addressable Market (TAM) is absolutely enormous since it’s growing with the size of internet users.
Slack expanded the Model with enterprise option where they don’t hunt the rabbits and mice but bigger beast. The virality and word of mouth is the most scalable channel they can ask for. They figure out the pains and desires of their users which gives Slack an incentive to approach new international markets. In fact, more than half of Slack users are in more than 100 countries outside United States
These markets have localized support and offerings.
Every channel is constantly evolving and moving, which demands that every company stay on their toes and manage all four frameworks.
Chapter 7: Slack’s Friends and Family - Partnership Moves & integrations
Successful companies often acquire another company to get rid of competition (i.e. travel and restaurant TripAdvisor buying a plethora of local travel apps), acquire another customer base (Amazon with Whole Foods and Zappos) or gain access to the proprietary technology that will help them grow (Facebook with the acquisition of Instagram).
Most of the big companies wait for the disruptor to reach a certain stage: The acquirer eliminates the threat, prevent other competitors from swooping and stealing the technology, and instantly reaches new audiences. Sometimes, acquisitions happen just because a company needs high-tier development talent and knows that a startup has the top minds in the business.
A merger is a different strategy. When Facebook acquired Instagram for one billion, most of the public thought it was way too much for a simple mobile photo app run by twelve people with no revenue model.
But six years after the merger, Instagram has a billion monthly active users which are exposed to Facebook Ad campaigns. Instagram already makes up 28 percent of Facebook’s mobile ad revenue. And the channel is growing year-over-year.
Since Slack’s product idea isn’t hard to replicate — internal chat technology isn’t much different than IRC. Keep in mind Slack’s competitors CampFire, Yammer and HipChat tackled team communication years Slack’s solution. For Slack to stay ahead of the pack, they had to grow fast. They decided to use mergers and acquisitions to strategically fill in their success gaps.
Companies like Yammer, Microsoft, and others looked to remake internal communications in ways that looked more like consumer tools in the Web 2.0 era, but Slack came out with an approach that was initially just a slick chat and team communications tool. — Matthew Lynley, Techcrunch
Sep 26, 2014 - Slack acquires Spaces - Spaces had a document collaboration technology that greatly increased Slack’s capabilities
Jan 28, 2015 - Slack acquires Screenhero - What’s a messaging app without screen-sharing and voice chat? All six employees who worked for Screenhero joined Slack.
July 17, 2018 - Slack acquire Missions - Robots and Pencils’ app Missions allower Slack users to build tools to automate simple routines without much technical knowledge. It’s a lot like Zapier for Slack users.
Slack’s integrations are key to its success: Slack has more than 1000 apps available in their app directory. According to TechCrunch, 94% of paid business users use apps and integrations while 65% of teams have built their own.
With Mission’s, visual flow the creation of new integration is easy, and allows for the customization Slack users want.
Jul 27, 2018 - Partnership with Atlassian
Slack announced the acquisition of the Stride and HipChat products from Atlassian. Slack and Atlassian had a previous relationship, with Atlassian tools like Trello, Bitbucket and Jira already integrated with Slack – adding project management to the already robust communication tool.
However, Slack’s acquisition of Stride and HipChat allows it to upgrade the workflow capabilities of the product, especially large enterprise businesses. The Stride collaboration tool enables video, voice and chat at the same time, while HipChat has been one of Slack’s largest competitors. As a predecessor (HipChat launched in 2010), they acquired significant user base over the years before losing out to Slack’s accelerated user acquisition
Both HipChat and Stride will migrate their users to their once rival’s platform, and cease all support by February 2019. About 2,600 employees from Stride and HipChat will begin using Slack. [http://fortune.com/2018/07/26/hipchat-slack-atlassian-chat-software/]
KEY TAKEAWAY #5 — Acquisitions.
Acquisitions are more than just getting rid of competition. Consider what else you can win by purchasing a competitor or complimentary product.... Customer base, new talent, new technology?
Chapter 8 - Future Proofing the Company and the Product
We’ve seen multiple high-growth companies ‘rest on their laurels’ rather than continuing to iterate and optimize.
Slack’s initial intention was building a solid customer-centric product that isn’t just functional, but adored.
The majority of their marketing efforts were poured into making their brand fun, lighthearted, and accessible.
People who use it have the same perception of the brand. It’s ingrained in their brains because Slack put all the effort in conveying that core message.
This is something Google or Microsoft cannot achieve. At least not in the short run.
While they can offer the best integrations, tools, and technical perfection it will still be the product of Google/Microsoft. It’s the product of a big corporate company who owns everything.
When someone looks at Slack they see Animals! Video with bright colors and quirky loading messages. If they look at Microsoft, the see a different brand message - a more corporate oriented machine with a serious tone.
It’s the same reason why HipChat which is arguably the same product and was launched 4 years before Slack, couldn’t grow.
“Slack won the branding game because they invested in emotional capital. “
Integrations and technical flexibility keeps the team at the forefront of the team-communication industry. Strategic acquisitions of companies allows them to have the best-in-class talent and even an instant surge of new users.
Stewart Butterfield talks about the importance of inclusion and diversity. And it’s not just empty virtue-signalling.
- Globally, 43.5% of the workforce is comprised of women (48.1% of managers are women)
- 11.5% of the workforce is comprised of people from one or more underrepresented racial and/or ethnic group
This is significantly better than Microsoft or Google who haven’t made any improvements from the baseline at 30%.
This tells the public that Slack cares for its employees and they love the company.
Source: Diversity at Slack | https://slackhq.com/diversity-at-slack-2
Because their care of safe environment and appreciation the reviews on Glassdoor are glowing.
- “The NICEST, most thoughtful company culture I've ever experienced”
- “genuinely cares about you and your life inside & outside the company “
The core Slack team - the original founders love working with each-other. They have been through thick and thin, ran the gauntlet and stepped over the charred corpses of failed products. They are connected with a common goal to keep their customers happy.
When you look at the military history, the battle-hardened and seasoned soldiers who were a part of the same company fared much better in the field than fresh recruits. It’s only natural. Every individual in the tight-knit group knows each other and rely on them because they know their capabilities.
In the book, From Impossible to Inevitable, author Aaron Ross talks about defining your destiny — in every moment of growing your business you have two options:
- You give up in the face of challenges or
- Use them to motivate yourself and others and push forward.
During BUD/S (Basic Underwater Demolition/ SEAL) - notoriously hard training phase of becoming a Navy Seal, the training officers figured out who will make it through the training. It’s those individuals who find a buddy — a brother to rely on during the most grueling, mentally and physically challenging conditions.
You go through a trauma with a group of people, and you really get bound to them. You know, like, it's a really - it's a - makes you very close. And so I think we all wanted to continue working together. — Stewart Butterfield, Interview on How I Built This with Guy Raz
KEY TAKEAWAY #6 — Brand = customer care.
Brand is everything your company does with your customers. Tie everything into that mantra - the happiness of your employees, the love of the product and most importantly - your customers’ satisfaction.
Slack has established itself as an idol of a business company — they are loved by small startup teams and large enterprises. Their panacea for internal communication was not only effective but also packaged in a way it’s easy and fun to use. The extreme focus on customer satisfaction only made it better through the years and minds of new users. And on top of that, the employees love working for it, believing they are making a positive change.