Personal blog of Yzmir Ramirez

Cross-border commerce company Zonos raised $69 million in a Series A, led by Silversmith Capital Partners, to continue building its APIs that auto classify goods and calculate an accurate total landed cost on international transactions.

St. George, Utah-based Zonos is classifying the round as a minority investment that also included individual investors Eric Rea, CEO of Podium, and Aaron Skonnard, co-founder and CEO of Pluralsight. The Series A is the first outside capital Zonos has raised since it was founded in 2009, Clint Reid, founder and CEO, told TechCrunch.

As Reid explained it, “total landed cost” refers to the duties, taxes, import and shipping fees someone from another country might pay when purchasing items from the U.S. However, it is often difficult for businesses to figure out the exact cost of those fees.

Global cross-border e-commerce was estimated to be over $400 billion in 2018, but is growing at twice the rate of domestic e-commerce. This is where Zonos comes in: The company’s APIs, apps and plugins simplify cross-border sales by providing an accurate final price a consumer pays for an item on an international purchase. Businesses can choose which one or multiple shipping carriers they want to work with and even enable customers to choose at the time of purchase.

“Businesses can’t know all of a country’s laws,” Reid added. “Our mission is to create trust in global trade. If you are transparent, you bring trust. This was traditionally thought to be a shipping problem, but it is really a technology problem.”

As part of the investment Todd MacLean, managing partner at Silversmith Capital Partners, joined the Zonos board of directors. One of the things that attracted MacLean to the company was that Reid was building a company outside of Silicon Valley and disrupting global trade far from any port.

He says while looking into international commerce, he found people wound up being charged additional fees after they have already purchased the item, leading to bad customer experiences, especially when a merchant is trying to build brand loyalty.

Even if someone chooses not to purchase the item due to the fees being too high, MacLean believes the purchasing experience will be different because the pricing and shipping information was provided up front.

“Our diligence said Zonos is the only player to take the data that exists out there and make sense of it,” MacLean said. “Customers love it — we got the most impressive customer references because this demand is already out there, and they are seeing more revenue and their customers have more loyalty because it just works.”

In fact, it is common for companies to see 25% to 30% year over year increase in sales, Reid added. He went on to say that due to fees associated with shipping, it doesn’t always mean an increase in revenue for companies. There may be a small decrease, but a longer lifetime value with customers.

Going after venture capital at this time was important to Reid, who saw global trade becoming more complex as countries added new tax laws and stopped using other trade regulations. However, it was not just about getting the funding, but finding the right partner that recognizes that this problem won’t be solved in the next five years, but will need to be in it for the long haul, which Reid said he saw in Silversmith.

The new investment provides fuel for Zonos to grow in product development and go-to-market while also expanding its worldwide team into Europe and Asia Pacific. Eighteen months ago, the company had 30 employees, and now there are over 100. It also has more than 1,500 customers around the world and provides them with millions of landed cost quotes every day.

“Right now, we are the leader for APIs in cross-border e-commerce, but we need to also be the technology leader regardless of the industry,” Reid added. “We can’t just accept that we are good enough, we need to be better at doing this. We are looking at expanding into additional markets because it is more than just servicing U.S. companies, but need to be where our customers are.”

Today we know of HubSpot — the maker of marketing, sales and service software products — as a preeminent public company with a market cap above $17 billion. But HubSpot wasn’t always on the IPO trajectory.

For its first five years in business, HubSpot offered three subscription packages ranging in price from $3,000 to $18,000 per year. The company struggled with poor churn and anemic expansion revenue. Net revenue retention was near 70%, a far cry from the 100%+ that most SaaS companies aim to achieve.

Something needed to change. So in 2011, they introduced usage-based pricing. As customers used the software to generate more leads, they would proportionally increase their spend with HubSpot.  This pricing change allowed HubSpot to share in the success of its customers.

By the time HubSpot went public in 2014, net revenue retention had jumped to nearly 100% — all without hurting the company’s ability to acquire new customers.

HubSpot isn’t an outlier. Public SaaS companies that have adopted usage-based pricing grow faster because they’re better at landing new customers, growing with them and keeping them as customers.

Image Credits: Kyle Poyar

Widen the top of the funnel

In a usage-based model, a company doesn’t get paid until after the customer has adopted the product. From the customer’s perspective, this means that there’s no risk to try before they buy. Products like Snowflake and Google Cloud Platform take this a step further and even offer $300+ in free usage credits for new developers to test drive their products.

Many of these free users won’t become profitable — and that’s okay. Like a VC firm, usage-based companies are making a portfolio of bets. Some of those will pay off spectacularly — and the company will directly share in that success.

Top-performing companies open up the top of the funnel by making it free to sign up for their products. They invest in a frictionless customer onboarding experience and high-quality support so that new users get hooked on the platform. As more new users become active, there’s a stronger foundation for future customer growth.

Software buying has evolved. The days of executives choosing software for their employees based on IT compatibility or KPIs are gone. Employees now tell their boss what to buy. This is why we’re seeing more and more SaaS companies — Datadog, Twilio, AWS, Snowflake and Stripe, to name a few — find success with a usage-based pricing model.

The usage-based model allows a customer to start at a low cost, minimizing friction to getting started while still preserving the ability to monetize a customer over time because the price is directly tied with the value a customer receives. Not limiting the number of users who can access the software, customers are able to find new use cases — which leads to more long-term success and higher lifetime value.

While we aren’t going 100% usage-based overnight, looking at some of the megatrends in software —  automation, AI and APIs — the value of a product normally doesn’t scale with more logins. Usage-based pricing will be the key to successful monetization in the future. Here are four top tips to help companies scale to $100+ million ARR with this model.

1. Land-and-expand is real

Usage-based pricing is in all layers of the tech stack. Though it was pioneered in the infrastructure layer (think: AWS and Azure), it’s becoming increasingly popular for API-based products and application software — across infrastructure, middleware and applications.

Image Credits: Kyle Poyar / OpenView

Some fear that investors will hate usage-based pricing because customers aren’t locked into a subscription. But, investors actually see it as a sign that customers are seeing value from a product and there’s no shelf-ware.

In fact, investors are increasingly rewarding usage-based companies in the market. Usage-based companies are trading at a 50% revenue multiple premium over their peers.

Investors especially love how the usage-based pricing model pairs with the land-and-expand business model. And of the IPOs over the last three years, seven of the nine that had the best net dollar retention all have a usage-based model. Snowflake in particular is off the charts with a 158% net dollar retention.

Due to COVID-19, business continuity has been put to the test for many companies in the manufacturing, agriculture, transport, hospitality, energy and retail sectors. Cost reduction is the primary focus of companies in these sectors due to massive losses in revenue caused by this pandemic. The other side of the crisis is, however, significantly different.

Companies in industries such as medical, government and financial services, as well as cloud-native tech startups that are providing essential services, have experienced a considerable increase in their operational demands — leading to rising operational costs. Irrespective of the industry your company belongs to, and whether your company is experiencing reduced or increased operations, cost optimization is a reality for all companies to ensure a sustained existence.

One of the most reliable measures for cost optimization at this stage is to leverage elastic services designed to grow or shrink according to demand, such as cloud and managed services. A modern product with a cloud-native architecture can auto-scale cloud consumption to mitigate lost operational demand. What may not have been obvious to startup leaders is a strategy often employed by incumbent, mature enterprises — achieving cost optimization by leveraging managed services providers (MSPs). MSPs enable organizations to repurpose full-time staff members from impacted operations to more strategic product lines or initiatives.

Why companies need cost optimization in the long run