Freshworks and the Globalization of SaaS

How do you make lower priced SaaS work?

Hi friends,

In a previous piece, I touched on the idea that Gitlab and Freshworks which both went public recently highlighted the increasing globalization of SaaS. While Gitlab pioneered building a truly-remote first SaaS company, Freshworks highlights that it is possible to build a SaaS company based in a low-cost region which serves global customers.

As stated in their S-1, Freshworks is the company that wasn’t supposed to win.

So, what happened and what can we take away from Freshworks’ success so far?

Pricing Arbitrage

Many SaaS companies tend to focus on a single product, and are typically top-of-the-line feature and experience wise, but also top-of-the line price wise for that product.

While amazing products at good prices is one mantra for success, another one is building great products at amazing prices. Arguably, Freshworks has taken this latter approach.

Its key offerings tend to be 30-40% lower per seat than competitors for similar feature sets.

In fact, the idea for Freshworks was prompted by Zendesk’s 60-300% price increase. Girish, the founder and CEO believed it was possible to create a lower priced competitor for SMBs.

Freshworks’ products don’t necessarily show up in the top right of any Gartner magic quadrants (i.e., as leaders), but they are solid enough, and often the ideal choice for many customers.

The reason for that is that for many businesses, particularly SMBs, a simple and easy to use software that has the features required, even if it isn’t absolutely best-in-class in every area is good enough.

What’s really interesting about Freshworks is that even given the lower pricing, on a percentage of revenue basis, Freshworks has:

  • ~80% gross margins which is comparable to most SaaS companies

  • ~50% of revenue spent on S&M which is comparable to most SaaS companies

  • ~25% of revenue spent on R&D which is only slightly higher than the median SaaS company at IPO, and quite impressive given the product suite

So how do they manage numbers like this with their products priced 30-40% lower compared to competitors?

It comes down to primarily 3 factors:

  • Playing to geographic strengths

  • Multi-product approach

  • Their PLG approach and democratic design principles

Play to your geographic strengths

Freshworks is headquartered in Chennai, India. Girish Mathrubootham, the founder & CEO, highlighted how every location comes with advantages and disadvantages.

The big, big advantage of Chennai, especially at the time of inception, was that developer talent was a lot less scarce and a lot cheaper.

One thing this allows for is that the R&D and cost of revenue in absolute terms can be lower, meaning that even with lower priced products, they can be comparable to other SaaS companies on a percent of revenue basis.

The other benefit, highlighted by Girish on podcasts, is that rather than the mantra of “focus”, which is often needed because developer talent is scarce in American companies, Freshworks was able to experiment a lot. The company almost served as a VC, greenlighting multiple different teams to work on multiple products, some of which failed, but some of which didn’t.

Today, 88% of Freshworks’ employees are based in India, but the majority of their revenue comes from outside of India. In fact, 42% of it comes from the US alone.

Multi-product mindset and approach

Many of the largest SaaS companies today are multi-product. But arguably Freshworks got there a lot earlier in their journey, and in a lot broader and more competitive categories than startups typically do today.

Freshworks has 4 key products offerings:

  • FreshDesk for Customer Experience

  • FreshService for IT service management

  • FreshSales for Sales and Marketing

  • Freshworks NEO, a low-code platform to extend Freshworks’ products

Going multi-product was part of Freshwork’s mindset:

  • They experimented with and greenlit teams to work on multiple different adjacencies to their initial core product in Customer Experience.

  • They adopt a “framework” approach to building, trying to platformize components wherever possible so that they can be reused across different products

But critically, the multi-product approach also helps the success of their business in the following ways:

  • Ease of adoption for SMBs: For many businesses, especially SMBs, a full suite from one vendor across use cases at a reasonable price point is often more appealing than best in class software at high price points that all then have potentially additional costs to integrate.

  • Higher LTVs: Even with lower priced products, Freshworks still has to compete with others on a level-playing field on marketing and sales. However, the multi-product approach allows for increasing the average revenue per customer and their lifetime values, and so can reduce the payback period on Freshworks’ acquisition cost and even allow them to spend more on CAC for the customer given a higher potential LTV. Freshworks has a healthy dollar expansion in the 110-115% range, and over 45% of ARR comes from customers who use multiple products.

“Democratic Design” Principles and PLG approach

Freshworks pioneered the Indian Democratic Design movement, which outlines a few design principles that they follow:

  1. Simplicity - Democratically designed products are approachable, easy-to-use and self-explanatory. Good design brings together form and function to solve problems in the simplest way possible.

  2. Self-reliance - Global products must be easy to deploy, adopt and maintain with minimal assistance to empower as many users as possible.

  3. Scalability - Democratically designed products are developed with a large number of users in mind and, therefore, must work for businesses of all sizes.

  4. Craftsmanship - Global markets and customers expect the best possible product and high-quality experiences crafted to perfection.

  5. Affordability - Central to the idea of democratic design is affordability. Making scalable products available to everyone but also passing on the benefits of economies of scale to the end-user.

Freshworks also strongly believes in the mantra “Delight Made Easy”, which has two parts and essentially necessitates a product-led growth approach:

  • Delight customers with simple and easy to use products and good customer service

  • Make it easy to do so via transparent pricing and instant onboarding and low total cost of ownership

These principles have allowed them to build products used by over 50,000 customers and allowed them to reduce their S&M costs somewhat, especially when reaching the long-tail of customers.

PLG is the core foundation of Freshworks and has helped us serve organizations of all sizes

It should be noted however, that Freshworks’ pairs their PLG approach with outbound sales and a partner ecosystem, and despite the 50,000 customers, the ~2% who spend more than $50K/yr comprise of ~40% of the revenue.

Additional Reading

The success of Freshworks’ highlights the opportunity for simple and easy to use multi-product offerings that are lower-priced in both the SMB and even upmarket segments. ByteDance can be considered as another example of a company taking this route with their Lark offering.

For additional reading on Freshworks, I recommend the following:

  1. Profitwell Podcast with CEO Girish Mathrubootham

  2. Jamin Ball’s Freshworks S-1 benchmarks

  3. Freshworks’ Democratic Design

  4. Freshworks’ S-1

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