A belief about UCaaS vendor profitability permeates the hosted market. It goes like this. Over time, large enterprise customers will account for a greater percent of the seat sales of any given vendor, and then lift cloud profits to acceptable levels. Voila. But what if that's wrong? (Spoiler alert: It's wrong.)
Eastern Management Group research analysts recently completed a four-year study of the UCaaS market and published the research in a new report, "Worldwide Hosted PBX Market 2017-2022." With vertical market data from more than 3,500 IT managers studied worldwide, we're presenting some of our research in this post, the seventh in an eight-part UCaaS series.
The hosted PBX market comprises more than 200 vendors. Mostly the vendors sell a similar product: 10 to 80 features (e.g., network connectivity, voice calling, failover to PSTN, caller ID, administrator Web portal) purchased by cost-conscious customers. Features come in shrink-wrapped bundles, frequently sold in two or three different packages. The average sale is for fewer than 15 seats.
SMBs lap up these UCaaS products, which practically sell themselves. Indirect marketing draws in prospects to a call center (70% of all new customers hunt down the vendors, and not vice versa). The call center closes the deal. Everyone moves on.
In the wake is an average sale generating close to $25 per seat; minimal profits to the provider (vendors can spend 50% of revenue on marketing and sales); and little or no pull-through sales, except for maybe a phone instrument. After the hosted PBX cutover, no one is there to sell the customer on upgrades, in part because no one knows how, no one expects it, or the next new customer beckons. This is a flimsy proving ground for larger and larger enterprise sales delivering much greater profit.
In a few short years the number of hosted PBX companies will increase by several hundred. Then the likelihood of a startup selling new customers 10 to 15 low-priced seats at a time, and expecting to successfully graduate to the enterprise market, will be as far-fetched as it is for today's incumbents.
Here's the way to move out of the cheap seats, become a trusted partner of the large enterprise, probably double ARPU, and make more profitable sales even to the SMB. Vertical industry marketing is the new fast lane for hosted UC service providers.
Vertical Industry Fast Lane
Every vertical market has distinctive unified communications needs. Look at the healthcare industry and its dependence on video. Check out Zoom's skyrocketing video sales to hospitals for improving patient outcomes. In the education market look at AtlasIED, a company that offers mass communications systems for classroom security to keep kids safe. Look at CRM from Salesforce to better manage customer relationships and boost end-user sales for several vertical markets. Matching industry needs with features and even ecosystem partners is a win-win for hosted PBX vendors and customers.
Our analysts at Eastern Management Group track 22 vertical industries. Here's what we know. Hosted PBX vendors offer thousands of UCaaS features, APIs, integrations, premises and network equipment products, services, managed services, and network options for vertical markets. They deliver value to the enterprise. They easily double enterprise customer ARPU for vendors. And they'll work the same magic for the five-seat SMB. So whether 200 or 400 UCaaS providers are in the market, vertical industry marketing helps make the hosted PBX provider a very profitable standout.
This is the seventh in an eight-part biweekly series based on research from Eastern Management Group's exhaustive "Worldwide Hosted PBX Market 2017-2022" report. For earlier segments, see:
For questions about the hosted PBX study please ask Eastern Management Group researchers.
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