SM: Out of 5.2M small businesses, only 800,000 are using a software service for payroll?
JH: It is under 16%, and that is why this is an attractive space because it is un-penetrated. All 5.2M of those people have some solution, but our belief is that a lot of them are doing it manually and they will benefit greatly from a simple solution like we provide. There is another category of solutions which is the traditional full service offered by the likes of ADP and PayChex. The last category for these solutions is software add-ons to programs like PeachTree and QuickBooks. These programs offer a paycheck calculator add on, but you are still left to do the tax filing.
SM: That is the biggest pain!
JH: It will calculate the checks, but then you have to update the software to get the latest tables. Those software programs are used by about 1M employers, so that accounts for the methodologies used by 1.8M small business employers. That means more than 2/3 of the market are doing this by hand, or using their accountants. We probably get 40% of our business from new employers, the rest are coming from all different places. They are just looking for a better way to do payroll.
SM: Is there any kind of vertical segmentation in this mix?
JH: No, it is all over the map. There is no dominant industry or demographic. It is very fragmented, very consumer oriented. Every employer has reporting to do. There are some segments which are not represented very well; distribution and manufacturing are not represented very well.
SM: I would expect retail to be very well represented.
JH: Small stores are definitely well represented. Also, we have a lot of business with consultants, doctors, etc. In terms of segmentation we have spent a lot of time understanding the behavior of these people. The people who found us on the web have been more technically savvy and are much more self-help.
SM: They are better customers for you.
JH: Very much so. One of the challenges, quite frankly, as we go deeper into the mix is to continue to get smarter about how we provide support for people who are not as savvy.
SM: One of the ways to reach the segments like the lawyers and the doctor’s offices is by marketing directly to them, but then you never know how much support you will have to give them.
JH: We have had mixed experiences with vertical marketing.