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Slack Relies Heavily on Its Biggest Customers

By Evan Niu, CFA – Apr 29, 2019 at 8:45PM

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The 575 big spenders represented 40% of revenue last year.

Slack is preparing to go public, and the popular enterprise chat company's IPO filing shows that the majority of organizations that use its service are not paying customers. Slack says that it has over 88,000 "Paid Customers," defined as any organization that has at least three users and is on a paid subscription plan. There are over 500,000 organizations that are currently using the free tier.

Of those paid customers, Slack relies very heavily on fewer than 600 of them.

Slack app

Image source: Slack.

Getting paying users to pay more

As an enterprise software company, Slack naturally concentrates its sales efforts on larger organizations that have deeper pockets and may derive more value from the added features of more expensive tiers, such as user provisioning, interactive screen sharing, and 99.99% guaranteed uptime, among others. "Our direct sales and customer success efforts are focused on larger organizations who have a greater number of users and teams and have the potential to increase spend over time," Slack writes in the filing.

The company counts how many organizations are paying over $100,000 in annual recurring revenue (ARR) as a key metric. As of the end of January, when its most recent fiscal year closed, Slack had 575 customers paying over $100,000 in ARR. These customers combined represented a whopping 40% of revenue in fiscal 2019. The good news is that customers paying over $100,000 in ARR are growing steadily, more than tripling over the past two years.

Chart showing number of paid customers over $100,000 ARR over the past eight quarters

Data source: S-1. Chart by author. Fiscal quarters shown.

Like other enterprise software companies that use a software-as-a-service (SaaS) model, Slack also measures net dollar retention rate, a measure of revenue retained from current customers. Generally speaking, a rate above 100% means a company is successfully generating more revenue from existing customers, either through upselling or price increases (or both).

Slack's net dollar retention rate has been declining, which the company attributes to a growing revenue base as it successfully expands business with its customers: "Our Net Dollar Retention Rate has declined across most of the eight quarters as our base of revenue has grown and our penetration within existing, long-term Paid Customers has increased." This figure will naturally fluctuate over time, but Slack's overall net dollar retention rate remains at a healthy 143%.

Chart showing net dollar retention rate over time

Data source: S-1. Chart by author. Fiscal quarters shown.

Despite the heavy reliance on customers spending over $100,000 in ARR, Slack notes that it had no customer representing over 10% of revenue in any of the last three fiscal years.

Getting more users to pay

In terms of converting free users to paid users, it's a bit trickier to gauge Slack's progress there. The company does not directly disclose how many users are associated with paid plans, nor does it provide a historical look at how many organizations have used the free tier over time. Those figures could be used to calculate a conversion rate.

The free tier is still an important funnel to grow paid users, even if investors don't have insight into a precise conversion rate.

We primarily attract new and prospective organizations organically, through a self-service customer engagement model. Prospective organizations can evaluate and subscribe to Slack directly on our website, through either our Free subscription plan or one of our self-service paid plans. As organizations realize the benefits of Slack, they often expand their usage and spread the word organically throughout their networks about the benefits they have experienced.

Slack is still on the hook to pay the hosting costs for free users and may never recoup those costs if those users never convert to paid plans. Over time, Slack could potentially tweak the feature sets in its tiers to nudge more users into paid plans, as is common in enterprise software.

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