An Introduction to Product Expansion

Part 2: Segment Expansion

Note: this is part 2 of a series on strategic Product Expansion. The introduction and outline can be found here. The previous section on Market Expansion can be found here and the next section on Solutions Expansion here.

Segment expansion is building product features to capture higher value deals while solving the same general problem.

For ZenPayroll, segment expansion was moving from 1–30 employee SMBs to businesses with 50+ or 70+ or 100+ employees. The product offers the same functional solution: payroll for businesses.

Because ZenPayroll was priced per employee per month, the customers served by these features paid more on a per-customer basis. If it took roughly the same amount of sales/marketing to onboard a customer with fifty employees as to onboard one with thirty then we made more money. (Yay.)

Blockers

Segment expansion is often the most tempting. Of course you would prefer $600 per month to $30 per month. But feature development aside, there are sales constraints to moving up-market.

Maturity and social proof

In the beginning, we had a customer base primarily comprised of SMBs from 1–12 employees and a small contingent of 12–20 employee companies. Even if we built the necessary features, we could not sell to a company with 70 employees.

They would ask, quite reasonably, about our experience with companies their size. They would ask for a few customer references. Our experience was zero and we had no customers like them to reference.

From the perspective of their HR team, the risk of botching the entire company's payroll raises a high barrier to entry. In the case that our product was not as good as advertised—if we mispaid taxes or locked employees out or hadn’t built the right features for larger customers because we didn’t have any current customers for user research and development—then the HR person’s boss could rightly say, “Why did you adopt this system that literally no one of our size has used before?”

The truism you hear around social proof: “no one ever got fired for buying IBM.”

Addressing concerns

Intro intro intro intro

Setting the terms

If you go back and read press releases or listened in on sales/support calls from ZenPayroll in 2013/2014, we rarely mentioned metrics like average employee size or number of customers.

This was an explicit company policy. These numbers are private financial information, so this isn't atypical or nefarious. We just weren't trying to announce the revenue of a one year old company, especially a number that changed so rapidly.

The more strategic reason for not disclosing these numbers is that they didn't address our customers' concerns around product maturity and social proof. In fact, the true numbers would probably hurt our case. Hearing we had fifty customers or that our average customer had twelve employees isn't comforting for something as serious as payroll.

But we didn't not share numbers. There was one in particular we talked a lot about: payroll processed. We would say things like, “we process millions of dollars in payroll per year.” It sounds like a lot! And it's not not a lot of money, but it's not as much as it seems.

For example, take a company with twelve employees paying each employee an average salary of $90,000. Now ask yourself which is more impressive: "running payroll for one twelve person company" or "processing over one million dollars per year".

Right?

Right.

When potential customers asked how many businesses we served or what our largest customer was, what they were really asking was if they could trust us. We chose to answer that question rather than what they literally asked.

Social proof by proxy

ZenPayroll's early investors were primarily angels. Many were CEOs of well-known companies: Jeremy Stoppelman of Yelp, Aaron Levie of Box, Drew Houston of Dropbox, Patrick Collison of Stripe, Jared Leto of…Jared Leto. Anyway, there's probably not much we learned about payroll from Jared Leto but successful people backing you does signal to potential customers that

Walking up market

If we approached a company with twenty-five employees, however, our experience with twenty employee businesses was relevant enough. If we could handle customers with twenty employees, there’s a reasonable assumption we could handle one with twenty-five. Once we had a dozen twenty-five employee customers, selling to thirty employee SMBs wasn’t so bad. And on and on. The more you win the more you win.

Your customer base is itself an asset when selling new customers. There will be, of course, points where that asset is not enough; when segment expansion became less like a steady incline and requires concerted product development or redesigns to jump forward. But don’t underestimate the value of proven execution; of answering the “can you handle us” question as well as possible before expanding upwards.

Where to end

For Gusto, the segment expansion has mostly capped out in the 100-ish employee companies. Strategically, you might decide to cap segment expansion when:

  • the marginal costs of product implementation don't match the expected value of new customers
  • the marginal cost/benefit of segment expansion is less compelling than other types of expansion

Note that segment expansion can get harder as you expand the problems

The question of where to stop yourself is beyond the purview of this piece (It Depends™.) For companies generally a few factors include: prioritizing focus over breadth, finite product bandwidth and expertise, costs of moving up-market (in people or capital, though the former is often a function of the latter), the mission and ambition of the company, etc. etc. etc.

Conclusion

Up next, we'll cover segment expansion.

Segment expansion is building product features to move up to higher value deals while solving the same general problem.

For ZenPayroll, segment expansion was moving from 1–30 employee SMBs to businesses with 50+ or 70+ or 100+ employees. The product offers the same general solution—payroll for businesses—but larger customers needed additional features.

Because ZenPayroll was priced per employee per month, the customers served by these features had a higher ACV (average contract value). If it took roughly the same amount of sales/marketing to onboard a customer with fifty employees as to onboard one with thirty then we made more money. (Yay.)

Blockers

Segment expansion is often the most tempting. You would rather have a customer paying $600 per month versus one paying $30 per month. But feature development aside, there are sales constraints to moving up-market.

Maturity and social proof

In the beginning, we had a customer base primarily comprised of SMBs from 1–12 employees and a small contingent of 12–20 employee companies. Even if we built the necessary features, we could not reasonably sell to a company with 70 employees.

They would ask, quite reasonably, about our experience with companies their size. They would ask for a few customer references. Our experience was zero and we had no customers like them to reference.

The marginal risk for their HR team would be far too high. In the case that our product was not as good as advertised—if we mispaid taxes or locked employees out or hadn’t built the right features for larger customers because we didn’t have any current customers for user research and development—then the HR person’s boss could rightly say, “Why did you adopt this system that literally no one of our size has used before?”

The truism you hear around social proof: “no one ever got fired for buying IBM.”

Addressing concerns

Intro intro intro intro

Setting the terms

If you go back and read press releases or listened in on sales/support calls from ZenPayroll, we rarely mentioned metrics like average employee size or number of customers. This was an explicit company policy.

These numbers are private company information, so this isn't surprising. We're not trying to announce the revenue of a one year old company, especially a number that changed so rapidly.

The more strategic reason for not disclosing these numbers is that they didn't address our customers' concerns around product maturity and social proof. Hearing we had fifty customers or that our average customer had twelve employees isn't comforting for something as serious as payroll.

But we didn't not share numbers. There was one in particular we talked a lot about: payroll processed. We would say things like, “we process millions of dollars in payroll per year.” It sounds like a lot! And it's not not a lot of money, but it's not as much as it seems.

Take a company with twelve employees paying each employee an average salary of $90,000. Now ask yourself which is more impressive: "running payroll for one twelve person company" or "processing over one million dollars per year".

Right?

Right.

Social proof by proxy

Do you know who invested in

ZenPayroll's early investor were angels. Not just any, but

Walking up market

If we approached a company with twenty-five employees, however, our experience with twenty employee businesses was relevant enough. If we could handle customers with twenty employees, there’s a reasonable assumption we could handle one with twenty-five. Once we had a dozen twenty-five employee customers, selling to thirty employee SMBs wasn’t so bad. And on and on.

Your customer base is itself an asset when selling new customers. There will be, of course, points where that asset is not enough; when segment expansion became less like a steady incline and requires concerted product development or redesigns to jump forward. But don’t underestimate the value of proven execution; of answering the “can you handle us” question as well as possible before expanding upwards.

Where to end

For Gusto, the segment expansion has mostly capped out in the 100-ish employee companies. Strategically, you might decide to cap segment expansion when:

Note that segment expansion can get harder as you expand the problems

The question of where to stop yourself is beyond the purview of this piece (spoiler: It Depends™.) For companies generally a few factors include: prioritizing focus over breadth, finite product bandwidth and expertise, costs of moving up-market (in people or capital, though the former is often a function of the latter), the mission and ambition of the company, etc. etc. etc.