The Ways of Zendesk

San Francisco’s Zendesk announced in an SEC filing its plans for a $150 million IPO.

The company may break $100 million in annual revenues this year, and is not yet profitable (which may — or may not — matter to tech investors).

Zendesk has a CRM product suite that is particularly appropriate to SMBs. Their suite is a cloud-based CRM platform that runs off extensive inputs from social media. Their suite is action-oriented, designed to help SMBs dialog and engage with their customers. So, here we have the new model for CRM for SMBs: Cloud-based, fueled by social media, bi-directional communications (consumer, SMB).

They’re also using a new approach to pricing plans. Their starter plan is $1 per seat/month.  Although this is close to a true “freemium” model, it is NOT freemium — there’s an actual cost incurred, even if it’s only nominal (at first).

Zendesk is betting this pricing model will produce superior results, net, than a “free” or “fremium” model.

— Scenario A: A customer starts with a free version of a product. Soon enough, the vendor tries to upsell that customer into a paying product. But the customer sees the product as inherently “free,” and is resistant to moving to a paying model. (We saw a lot of this in the early days of Internet Yellow Pages).

— Scenario B: A customer starts with a product version that has a nominal cost — $1 per seat/month. Although there isn’t much difference between $0 and $1 in economic terms, PYSCHOLOGICALLY there’s a big difference. Putting a price on the starter package, even a nominal one, establishes the concept in the SMB’s head that this is not a free service — there’s tangible economic value to it.

Their bet with this pricing model is that it’s easier to move a customer from $1 per seat/month to a meaningful price than it is to move a customer from free to a meaningful price.

In any case, Zendesk has put several business model elements together in a creative way with their CRM offering for SMBs. The ways of Zendesk bear watching. Mindfully, of course.