How Slack Makes Money

Slack primarily makes money selling annual or monthly subscriptions to large organizations.

With over 10 million daily active users, it leads the market for enterprise communication software and has used advanced technology to create cloud-based, intuitive, and flexible tools for teams at companies or other institutions. Slack says its product helps increase collaboration, transparency, and organizational agility. It has also achieved the integration of various third-party applications on a single platform, making it easier for users to perform different tasks quickly and easily. Apart from providing a chat room for office teams, Slack has become more of an operating system for the workplace. Just like Facebook is the foundation for many consumer logins, Slack’s chat interface has the potential to be the basis for digital services and apps used at work. More than 65 companies in the Fortune 100 are paying for their workers to use Slack.

Slack went public on June 20, 2019, with a direct offering and its reference price was set at $26 per share, which translates to a $15.7 billion valuation. According to Crunchbase, it has raised $1.4 billion in 10 funding rounds from investors that include a majority of the top VC firms and angels. In June 2017, Bloomberg reported that Amazon.com Inc. (AMZN) inquired about a potential takeover with a price tag of $9 billion.

According to its S-1 filing, the firm's revenue in the year ended Jan. 31, 2019, was $400.6 million, representing an 82% increase from the previous year. It generated a net loss of $138.9 million for the latest fiscal year, a drop from $140.1 million in FY 2018 and $146.9 million in FY 2017. Its cash burn rate was $97 million and its cash, cash equivalents, and marketable securities stood at $841 million in FY 2019.

The company reported total revenue of $145 million, an increase of 58% year-over-year, and a non-GAAP loss of 14 cents a share in its first earnings report since going public. However, investors were disappointed with weak earnings guidance.

The Business Model

Slack advertises that it is completely free to use for as long and with as many people as you want. So how does it make money?

A percentage of organizations pay premiums for special features. Such features include access to an unlimited communication history, unlimited app integration, additional file storage, screen sharing, statistics, and more. With no apparent plans to run ads in the near future, Slack relies on a simple business model, charging monthly fees of $6.67 per user for the standard subscription and $12.50 per user for the plus subscription. It has also launched Enterprise Grid for larger organizations that have tens of thousands of users.

To the benefit of the users, customers only get charged per workers actively using the software, not "per seat" like the majority of enterprise software in the past.

The quality element is paying off. As of April 30, 2019, Slack had more than 95,000 organization with three or more users on a paid subscription plan. The company calls these "paid customers" and they make up about 16% of the total user base, which is 600,000. The company says 575 of these paid customers accounted for approximately 40% of its revenue in FY 2019. Organizations based overseas accounted for 36% of its total revenue in the same period. Slack also offers credits to customers when its uptime is below 99.99%.

Engagement on Slack is also very high, with active use topping 50 million hours for the week ended Jan. 31, 2019. On a typical work period in the same week, paid customers averaged nine hours connected to Slack through at least one device and spent more than 90 minutes actively using Slack.

Future Plans

Slack—co-founded by CEO Stewart Butterfield, Eric Costello, Cal Henderson, and Serguei Mourachov—was launched in Aug. 2013. As a platform for desk worker collaboration, it seemed to gain traction effortlessly. In April, just a few months after launch, Slack raised $42.8 million and reached a valuation of $250 million. Venture capitalists heard the buzz and saw the adoption of the software at their portfolio companies. Butterfield’s history of successful entrepreneurship—including co-founding Flickr, which was sold to Yahoo in 2005—further helped Slack receive upwards to 10 funding offers weekly.

International Expansion

The company hopes to maintain this momentum as it hits the stock market. Slack says a big contributor to its growth is expansion within existing customers. Its net dollar retention rate (NDR), a ratio of monthly recurring revenue from existing customers, was 143% as of Jan. 31, 2019. "We believe that our Net Dollar Retention Rate is a reflection of the rapid pace of adoption that often occurs as usage spreads within and across teams. We believe that all of these factors will contribute to a high lifetime value of an organization on Slack," it said in a filing. The company also plans to grow in international markets and anticipates requiring "significant capital expenditures" in order to complete this expansion while maintaining its standards and culture. It is currently being used in 150 countries.

The company also wants to invest in partnerships, product development, customer experience, customer support, sales and marketing, and acquisitions as it chases profitability.

Key Challenges

While Slack hit the ground running and has enjoyed phenomenal growth over the last few years, the numbers show this growth is slowing. Although its annual revenue grew by 82% in 2019, its annual growth in revenue was 110% in the year prior. Similarly, its revenue grew 67% in the first quarter of FY 2020 and 89% during the same period the previous year. Even its NDR has decreased as its penetration grew. It was 171% in FY 2017, 152% in FY 2018, and 143% in FY 2019.

The credits Slack offers customers when its service is disrupted also eats into its revenue. Slack distributed credits worth $8.2 million in the second quarter of fiscal 2020.

Experienced Competition

Slack also faces the threat of competition from older, more established players. It has named Microsoft Corp. (MSFT) its primary competitor. The tech giant offers a communications software called Teams for free or as part of its Office 365 suite of productivity tools. BernsteinResearch says data cited by The Wall Street Journal says that Teams has roughly 285 million paying commercial users. Slack has been able to fight it with a superior user interface, but the question is for how long.