Business

How does Zoom make money: Analysis of Zoom’s Business model

In a crowded space that was mostly dominated by Skype, the new kid on the block,  Zoom has dramatically gained popularity as a video-calling app. It’s now become the go-to service for small to large enterprises for online meetings and hosting video conferences worldwide. Given their superior quality of audio and video chat features, one often wonders how does Zoom make money? The answer lies in their freemium business model built on charging customers a reoccurring subscription fee for the products they offer and, of course, a lot of other factors that we’re going to discuss today.

How does Zoom make money: Analysis of Zoom's Business model

 

A short history lesson 

Zoom was founded by Eric Yuan, a former Cisco Webex employee. Cisco was then working on a similar service, but Yuan was left unconvinced. He found out that customers were unhappy, and there were issues with the system identifying the user’s product version. There also wasn’t a screen-sharing feature for mobile businesses. 

Determined to fix the problem, Eric pitched the idea of a video conferencing service but was rejected by Cisco.  So, he left Cisco along with 40 other engineers and started a company of his called Saasbee, Inc. The tech company initially had trouble finding potential investors. The venture capitalists they met with suggested that the space was extremely competitive and saturated with one too many offerings.

But, in June 2011, WebEx founder Subrah Iyer and former Cisco Senior Vice President Dan Scheinman agreed to come on board. By then, the company had already raised $3 million of seed money. They changed their name to Zoom, possibly influenced by a children’s book called “Zoom City.” 

In September 2012, Zoom launched a beta version that could host conferences with up to a maximum of 15 participants. Consequently, Series A funding saw them raising $6 million more. Then,  Zoom successfully launched version 1.0 of the program. The maximum number of participants was now capped at  25. By the end of the first month in business, Zoom had amassed a whopping 1 million daily active users. 

In September 2013, the company raised $6.5 million as Yuan confirmed that the daily users had ballooned to a mammoth 200 million. The money came pouring in as the number grew to $30 million in Series C and $100 million in Series D rounds of funding. The latter number came at an evaluation of $1 billion, making Zoom a so-called unicorn. In April 2019, they went public via an Initial Public Offering (IPO). The share price increased over 72% on the first day of trading alone. They’re currently one of the fastest-growing tech companies, gaining an unprecedented 635% in 2020. 

 

How does Zoom work? 

Zoom is a cloud-based SaaS  (software as a service) application that allows private individuals and businesses to interact virtually with each other. The software as a service model is essentially centered around the vendor hosting and maintaining the servers, code, infrastructure, and databases.

Customers are only required to pay a monthly or yearly subscription fee for the services rendered. This form of the model is a significant step-up from the on-premise delivery systems of the ’90s and the early 2000s. Surveys predict that over 80% of applications will be SaaS-based in the near future. 

It’s fairly simple to host, schedule, or attend a group meeting or a one-on-one meeting with Zoom.  Zoom can be used as a mobile app or desktop app for Windows and macOS. Zoom is also available as an extension for Firefox and Chrome.  

The competitive edge over other companies comes in the form of frictionless high-quality video and audio output. Large scale organizations use the seamless platform for conducting business meetings on a global level, with hundreds of participants joining in. 

 

Zoom’s business model 

Their business is centered around charging users a reoccurring subscription fee for the different products on offer. The freemium model works by offering limited services to hook customers and turn them into paying customers in exchange for upgraded services. Zoom also makes money from the promotion of certain hardware products.

One of the biggest advantages of such a business model is that the revenue can be predicted easily. Customers rarely tend to cancel their subscriptions. A flat monthly or yearly fee levied upon users is simple to comprehend. There are no hidden costs, and this transparency makes it easier for companies to convert free users to paying customers. But on the other hand, a constant challenge is the retention of customers. Companies need to find new ways to provide value to their users. This could prove to be extremely capital intensive for firms that are still trying to find their foot in a cutthroat market space.

 

How does Zoom make money?

To answer the question of how does Zoom make money, one needs to look closely at the freemium model that Zoom currently operates on. What this means is that a user can only enjoy limited services for free. A user is allowed to host group meetings with up to 100 people for a total of 40 minutes only. To avail of more advanced features, a premium plan must be bought.

 A freemium or a free trial-based model is apt for startups or companies that are trying to build a wide consumer base. It helps in bringing a large amount of brand awareness and driving user traffic through organic word of mouth. 

Since there is no cost associated with trying out the app or a particular service, most people are inclined to give it a try. Even if the free users do not translate to subscribers, the company can still collect critical information and data. This allows businesses to modify and test out their services to configure the needs of the paying customer better.

Take Spotify, for instance, which makes use of a similar business model. Users with the free version of Spotify have the same access to music and podcasts as a premium user. But, they have to endure through ads, only have a limited number of skips, and can only shuffle songs on mobile or while listening in the car. 

This may not be a major drawback to most users but poses a challenge to users that need an uninterrupted experience. These are the music aficionados that wouldn’t mind paying extra bucks for an upgrade. But, the company still continues to generate revenue from the free users by pushing across ads. 

Back to the company in question, here’s a closer look at each premium offering and how Zoom makes money off them:

 

Zoom Meetings and Chats 

This is the company’s flagship product allowing a user to host or attend Zoom meetings on a desktop or a mobile phone. Chats can be used to engage with the participants, share text, image, or audio files over the platform. 

So, how does Zoom make money from their most popular service? The answer lies in the four different types of packages available to consumers that are looking for upgraded features.

  • Zoom Basic: The free version that allows unlimited meetings for up to a maximum of 100 participants for 40 minutes.
  • Zoom Pro: Best suited to the needs of a small organization. It provides unlimited group meetings with 1 GB of recording per license and social media streaming. Costs $149.90/year/license or$14.99/month/license.
  • Zoom Business– for small and medium-tier businesses. Benefits include meetings with up to 300 participants, company branding, cloud-based transcripts, and branded email templates to send to invites. Costs $199.90/year/license or $19.99/month/license with a minimum of 10 hosts. 
  • Zoom United Business– includes all the features of Zoom United Pro. A user is entitled to unlimited calling facilities within US borders and Canada and can host meetings of up to a maximum of 300 participants.
  • Zoom Enterprise– for large-scale corporations. Benefits include a corporate URL, hybrid cloud service, and REST API that allows for seamless integration of video meetings into web applications and web tools. Costs $19.99/month/license with a minimum of 50  hosts.

All three paid plans come with an option of adding more than the stipulated number of participants at an additional fee. On the Pro plan, it’s five hundred more participants at an extra $64.99/month/host, while 1,000 is at $104.99. Similarly, on the Business and Enterprise plans, the cost is $69.99 or $109.99/month/host. 

 

Zoom Rooms and Work-spaces

Zoom Rooms is a software-based conferencing system that enables organizations to run video meetings with relative ease. Customers can use their existing hardware provider or purchase directly from Zoom-certified hardware providers. Zoom also provides installation support on such purchases. 

A starting subscription fee is $499/year/room, allowing up to 49 such rooms or a monthly fee of $49/installed conference room.  Zoom additionally earns a percentage from the hardware providers with every single sale; this sort of arrangement is advantageous to both ends as the hardware provider is rewarded with advertisement to a large number of customers in return. 

 

Zoom Phone 

An add-on to the existing Zoom services, this is a cloud-based calling solution that enables a user to pick up a quick call without video. Extra features include messaging, voicemail, call recording, AI-based call routing, and secure HD audio for crystal clear conversations, among others. This service costs an additional $14.99/month/host.

 

Zoom Video Webinars 

Users can host webinars with up to 10,000 participants with features like chats, polls to make them interactive. In contrast to Zoom meetings, Webinars only allow view-only attendees giving the host the ultimate control and can unmute any participant he/she likes. This service costs $14.99/month up to $64,900/year/license. The price can vary depending upon the number of attendees.

Zoom recently introduced Paypal integration allowing the host to charge a registration fee for a webinar. Upon completion of payment, they receive the webinar’s login details. This is integrated via the Zoom my money feature. Setting up a Paypal business account and configuring it with a Zoom account is a fairly simple procedure as well. 

In addition to these sources of income, Zoom also acts as an in-app marketplace. Third-party applications like Slack, Trello, or Hubspot can be installed to improve the overall user experience. 

 

Is Zoom only for businesses?

Quite recently, Zoom has also started offering packages for various keystone industries like healthcare, education, finance, and government sectors. These packages allow boosting productivity utilizing the resources and hardware that is already in place. 

Meanwhile, Zoom for healthcare aims at helping clinicians and paramedical personnel in keeping up with the dynamic needs of the industry. With telehealth and collaborative healthcare gaining prominence, the need of the hour is a unified communication system. This step could go a long way in improving patient outcomes while fostering an environment of wellness through better internal communication.

 

Is Zoom profitable? 

During the COVID-19 pandemic, Zoom saw a major hike in usage as work from home became the norm. Several educational institutions that switched over to online classes also started using the platform more actively. By the month of February, Zoom had amassed an additional 2.22 million users in 2020. 

This figure was higher than the users than what the firm has acquired in the entirety of 2019. Daily active users had climbed to a colossal 300 million by April 2020. As a result, Zoom stock went from less than $70/share to more than $150/share. In October, the market cap crossed a record $140 billion. 

So, with all those remarkable figures, is Zoom actually profitable? The revenue model’s been rapidly growing over the years. Running on losses initially, Zoom raked in a profit of close to $622.7 million in 2019, which dramatically rose to $663.5 million in 2020. 

 

Concerns over safety

The security lapses in the platform have come under severe scrutiny over the course of time. Initial claims of end-to-end encryption turned out to be misleading. Zoom clarified later that they meant “from Zoom endpoint to Zoom endpoint,” essentially meaning that the encryption was between Zoom servers and clients. User’s information shared has surfaced upon the dark web.

Yet another concern is a phenomenon referred to as Zoombombing. This refers to unintended people joining into a meeting and secretly listening to audio calls. One such atrocious instance was when a recent Holocaust memorial was disrupted with images of Hitler and shouting of anti-Semitic slogans. 

Zoom responded to this outcry from security researchers by announcing a 90-day freeze on releasing any new features in April 2020. This time was used to working on fixing pressing security privacy issues. Some of the efforts reported to have been undertaken are enforcing end-to-end encryption to all users, turning on meeting passwords by default, and working with third parties to test securities.

 

Conclusion 

During the COVID-19 pandemic, Zoom gained popularity and became the most used video conferencing platform. The high quality of audio and video streaming and their easy-to-use platform played a major role in turning them into a viral sensation. So, how does Zoom make money again? They basically offer a user to get a feel for their services and then convert them into a paying subscriber to avail upgrades. This type of sustainable business model and competitive pricing has helped them grow rapidly. Zoom recorded a revenue increase of 88% in 2020 and is currently valued at $47billion.

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