Xero Business Model

Xero Business Model Canvas - Xero Business Model

Xero is an online cloud-based accounting software that functions as an as-a-Service (aaS) model. This means that the Xero business model revolves around helping small and medium-sized enterprises (SMEs) manage their finances through a wide range of services aimed at analyzing, integrating, and supporting their various financial processes.

In this guide, we’ll take a look at the history, strengths, weaknesses, opportunities, and threats to the Xero business model.

A brief history of Xero

The company, known as Xero, was founded in 2006 by New Zealand tech entrepreneur Rod Drury and his accountant Hamish Edwards under the name Accounting 2.0. Drury felt that the traditional accounting software and data systems were outdated and the market was long overdue for significant disruption. 

Though cloud computing technology and aaS services were still in their infancy and many businesses skeptical about the idea of storing their vital financial information on the public internet, the duo strongly believed that this would change in the near future. 

Leveraging on this, they attempted to build a unique accounting system that did not draw inspiration from existing competitors. While there was initial resistance to this idea, Xero quickly grew to own a significant share of the local market. However, the company began to achieve more global recognition after several key moves, such as public IPOs, which listed the company on the New Zealand Exchange in 2007 and the Australian Securities Exchange in 2012.

Coupled with several rounds of investment from key figures in the world of venture capital, the brand quickly grew, achieving one million users in 2017 and about 2.74 million users in 2021. The company is currently valued at about $6.78 billion and has over 4,700 employees.

Who Owns Xero

Xero is a publicly traded company listed as XRO on the Australians Securities Exchange. Therefore, the company is owned by the public shareholders who own its stock.

Xero’s Mission Statement

Xero exists to make life better for people in small businesses, their advisors, and communities around the world by rewriting the world of small business by making it seamless, simpler, and smarter.

How Xero makes money

Let’s take a look at how Xero generates revenue.

Subscription Fees

The Xero business model and revenue stream are quite simple. Users are charged a subscription fee in exchange for access to their cloud-computing software and services. These subscriptions involve a three-tier pricing plan, depending on the size of your business and the extent of the services you require. The basic package is priced at $22, while the Growing and Established packages cost $34 and $65 respectively.

The brand also offers a range of other services besides its primary accounting software. This includes:

  • Planday: A scheduling software;
  • WorkflowMax: A project management service;
  • Hubdoc: A data capture service that allows users to import their important financial documents into one place;
  • TaxCycle: A tax preparation software for professionals;
  • Waddle: A financial service which provides flexible financing services to help SMEs manage cash flow;
  • Tickstar: An e-invoicing system which allows you to exchange business documents globally.

Xero’s Business Model Canvas

The Xero Business Model can be explained in the following business model canvas:

Xero Business Model Canvas - Xero Business Model

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Xero’s Customer Segments

Xero customer segments consist of:

  • SMEs (Small and Medium-sized Enterprises)
  • Accounting firms and bookkeepers

Xero’s Value Propositions

Xero value propositions consist of:

  • Scalable
  • Easy to use
  • Can be integrated with a wide range of other apps and services
  • Cheaper than similar alternatives
  • Offers a revolutionary approach
  • Offers a wide range of financial services

Xero’s Channels

Xero channels consist of:

  • Platform
  • App
  • Social media
  • Customer support
  • Website
  • Advertising
  • Xero University
  • Community forums

Xero’s Customer Relationships

Xero customer relationships consist of:

  • Self-service
  • Communities

Xero’s Revenue Streams

Xero revenue streams consist of:

  • Subscription fees

Xero’s Key Resources

Xero key resources consist of:

  • Revolutionary cloud-based computing platform
  • Key partners within the financial services industry
  • Various acquisitions
  • Intellectual property
  • Human resources such as IT staff, software engineers, customer support staff, etc.
  • Strong investor support

Xero’s Key Activities

Xero key activities consist of:

  • Cloud-computing platform operation and maintenance
  • Research and Development
  • Human Resource Management
  • Customer support
  • Marketing

Xero’s Key Partners

Xero key partners consist of:

  • Accounting and bookkeeping firms
  • A large number of apps which support Xero as a 3rd-party add-on
  • Investors
  • Banks
  • Large financial institutions
  • U.S. payroll platform Gusto
  • Acquisition of Paycycle
  • Acquisition of Spotlight Workpapers
  • Acquisition of Hubdoc
  • Acquisition of Instafile
  • Acquisition of Waddle
  • Acquisition of Planday
  • Acquisition of Tickstar
  • Acquisition of Locate Inventory
  • Acquisition of TaxCycle

Xero’s Cost Structure

Xero cost structure consists of:

  • Maintenance of IT cloud infrastructure
  • Research and Development 
  • IT operations
  • Marketing and branding
  • Sales
  • Customer channels and partnerships
  • Company acquisitions
  • Administrative expenses
  • Operating costs (rent, utilities, wages, legal fees, etc.)
  • Compensation and benefit packages

Xero’s Competitors

  • QuickBooks Online: This is an accounting software package which can be installed on a computer and is targeted towards SMEs;
  • FreshBooks: FreshBooks is an invoicing and accounting software Erich has over 30 million users worldwide and offers its services through a web-based cloud-computing software;
  • Sage 50cloud: Sage 50cloud is also aimed at SMEs and offers a suite of packages and services associated with accounting and payroll services.
  • Zoho Books: This is an online accounting software that allows users to sync separate accounts and helps manage their finances;
  • Wave Financial: This is a Canadian financial services product aimed at small businesses and offers a range of financial services including payroll processing, invoicing, receipt scanning, and so on.

Xero’s SWOT Analysis

Below, there is a detailed swot analysis of Xero. Let’s take a look at the strengths, weaknesses, opportunities, and threats to the platform.

SWOT Analysis of Xero - Xero Business Model

Xero’s Strengths

  • Integrates with a wide range of other apps, making the platform quite convenient and achieving a seamless workflow between multiple systems;
  • The platform supports unlimited users per account and does not charge extra for additional users;
  • Xero is cheaper than other alternatives which offer similar services;
  • Xero’s services are scalable, and it offers a three-tier plan, which means it can be used by businesses of different sizes;
  • The platform is easy to use;
  • You can add your accountant to your account and take advantage of their constant insights and monitoring;
  • Strong investor support;
  • Powerful innovative potential with a track record for releasing successful products.

Xero’s Weaknesses

  • The platform has not yet tapped into the U.S. market;
  • No live phone support, which makes it difficult for users to obtain live feedback when they encounter difficulties on the platform;
  • It places a limit on bills and invoices with the entry-level plan;
  • Investment into R&D is lower than other key industry players;
  • The profitability ratio and Net Contribution % of Xero are below the industry average;
  • Poor marketing.

Xero’s Opportunities

  • Attracting a larger share of the market by expanding into previously untapped markets;
  • New technologies and products may be the key factor that will allow the company to achieve a larger market share.

Xero’s Threats

  • Emerging technologies from competitors;
  • Demand for their most profitable products is typically seasonal (during tax season);
  • Rising pay levels and inflation;
  • Intense competition for market share.

Conclusion

Xero might not yet be considered a giant within the world of financial services, but it has the potential to cause significant disruption in the industry. Its innovative platform, strong free cash flows, and host of successful acquisitions suggest that the brand is certainly one to look out for in the coming years.

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