Payroll Secrets.

Over time two things have held true in payroll:

1. Every payroll provider looks to go "up market" at some point.

2. As sure as my name is Craig, they hand out price increases.

But why? The most recent price increase comes from Silicon Valley's payroll darling, Gusto. 

One customer we spoke with expressed disbelief at such a jump, saying that they felt Gusto no longer represented the “little guys” and had become the new ADP or Intuit when it comes to payroll processing. “I don’t think there’s a ‘little guy’ anymore,” the person said, requesting anonymity because of their ongoing business relationship. As a result of this price increase, the same customer stated that they will be pulling their business from Gusto as they feel there are other services providing the same level of customer service and features, but now at a lower price.

By comparison, Zenefits, Gusto’s “tech” competitor, currently offers free payroll services through the end of 2016. Once this promotion ends, it’ll charge $25 and $4 per person each month. Another company Simple Payroll might typically charge $15 and $3 per person per month. The biggest impact to this price increase will likely be for small businesses who see any cost change as potentially having a big impact on their budgets. Complete article here: https://everythingaboutdesign.com/gusto-raising-prices-for-all-customers-of-its-payroll-service-starting-october-1/

This occurrence is not new to the payroll industry, it happens with every provider at some point if they want to continue to grow their business. The problem is that these payroll service models are fundamentally flawed. Studies show that regardless of the size of your company, 1 employee or 100,000 employees outsourcing payroll is typically less than 1% of your overhead. In other words, it's not a big cost in terms of running your business. So with small businesses 1-49 employees you can quickly see the unit economics aren't staggering. Although it's a very profitable business.

So the initial path to growth is to acquire lots of small businesses. This can be achieved a number of ways. I won't get into those now. But if you've been around this space long enough, you know there are growth plateaus that typically require additional capital to bust through. Most payroll providers decide to build comfortable lifestyle businesses typically capping out at 3,000 business customers. There's 15k or so these throughout the US.

What we've seen over the last few years, are well funded venture capital backed startups that had the money out of the gate to market better software and breeze past those traditional growth gates. Quickly getting to 10k, 20k, 30k+ business customers. But now what? Go up market? Maybe a little, call it, servicing 50 to 100 employee companies, but not as many of those exist, they require more service and that space is more competitive, so it drives down margins.

Why can't these payroll providers just invest more marketing dollars and keep adding small business customers? Much like the last guard, Paycom, Paycor & Trinet (Paylocity is more of a mid market player) the problem you run into is a severely fragment market, where 40% of small businesses still DIY. That's right they handle their own payroll... by hand... and calculator... and pen... and paper!!! So they aren't interested in paying for payroll services.

Now you have to actually compete for business against the likes of ADP $40B market cap, Intuit $28B market cap and Paychex $21B market cap.  So guess what's the next best option? A price increase. More Ancillary services come next.

Traditional models lead you down a traditional path. Listen these are all good solid businesses that are helping bring automation and compliance to small businesses all over America. I just see the world through a different lens and believe our unique perspective on payroll can actually put a dent in the universe.

I probably should write more on this... like the impact of cloud technology, data analytics and Artificial Intelligence on payroll. Maybe I will...

Visagepayroll.com Free Payroll for 1 Million Small Businesses in the next 5 years.