hello and welcome to the bottom up skills podcast. We are at the fourth installment of our four part series. It is the case study into zoom video. In the previous episode, we would deep in the world of promotion and in particular, Zoom has got some killer full-stack partnerships going on a lot to learn there.

There's been a lot to learn so far, but I promise you, I still have a lot to share with you in this episode because this fourth P as usual, in a case study, we're going to go into profit and I can tell you one thing. Zoom has a very special business model. In fact, it is so good. It has this rare characteristic that it actually gets more profitable.

Over time as they get bigger, they actually make more percentage profit. Now this is incredibly rare, and this is what we call a network effect. I'm going to tell you all about that and plenty more in this, our last part, our last installment of the zoom case study buckle on in get your espresso because this one is going to be great.

It's the zoom case study part for profit. Let's go. Okay, here we are. The fourth P profit. How does zoom put the dollars in the bank? How do they grow? What's the economic model. Are they creating value? Are they capturing value? Well, the answer is yes. Yes, yes. And yes, let's get straight into it. Number one, this is a little bit counterintuitive.

They make lots of money because they have a strong freemium model. And the reason that this is counterintuitive is obviously you're giving away a really good product for free, but here's how it makes sense. This is the biggest money earner ever for them, because here's how it works. What they discovered is that if you try the free one, you will go on to buy the premium one, but I'm going to put another twist on here.

This is not just the SAS direct to consumer model. This even works on really big clients. Check this number out. 55% of hundred thousand dollars or highest revenue customers were started by a single employees, free trial, 55%. So in really big enterprise clients with hundreds of thousands of licenses from Zune.

Over half of those started with one employer, one employee having a free trial. So if you ever were in doubt about the freemium model, this is all the proof you need. So by giving it away by giving their product to people, to trial, to have a basic version, then they end up converting them, not just for a hundred dollar deals, but well, in excess of a hundred thousand dollar deals.

Okay. That's number one. So I like free freemium. It's a working for them. Now, the crazy thing here, and this is really unique. This is even to a greater extent than Revolut in our recent case study. What zoom enjoys is one of the biggest addressable markets I've ever seen because frankly who's their market.

Well, it's kind of everyone and, um, well, how you quantify that? I can't put a number to it, so I'm not going to go there. But I'm going to show you what happens when you've done all the things we've talked about and how your market just explodes under the right conditions. So what I've done is I've taken a year's worth of data, uh, from Google search.

It's a worldwide and I've compared what happened when quarantine and covert all happened. I can compared zoom with Skype, WebEx, uh, Google Hangouts, and blue jeans. And the data is off the charts then nearest competitor. When we talk about the volume of search is maybe 20% and that's Skype, maybe Skype got 20% of the increase of interest and a search queries to that of zoom.

Said differently. Zoom was always ahead pre COVID, but when COVID hit, it was such a perfect storm that all of the things I've been describing on this case study came together and they're business boomed and I'm talking, boom did not like twice. Three times as much as the nearest competitor, I'm talking like a five X return.

So because they are so well positioned, they have enjoyed a higher spike than any of their competitors and massive degree. This demonstrates how big their addressable market is and how well they've set up, not only their product, but also their brand to enjoy the bump when it came. Now we're going to get a little bit into some micro economics of how the business works, but this one is killer.

This one is the utopia of all economists, uh, of all, uh, chief financial officers, free cash flow. But what we're going to see is something bigger than that. We're going to see economies of scale. This is something that businesses often talk so much about. Um, you know, the classic thing is when two big companies merged together, they talk about, uh, you know, economies of scale and thing and things like that, which by the way, rarely ever work out to be so true.

But what is really crazy is over time, zooms efficiency actually increases whilst they are growing. So, this is really substantial, said differently as they're growing, as they're getting bigger. And remember bigger is often the thing that always holds companies back. You know, if you're a large fortune 50 company, if you get anywhere close to double digit growth, you're like, A superstar, right?

Yeah. Cause as it gets bigger, it gets harder to manage and to manage more complexity, so on and so forth. But I want you to check out, I want you to have in your mind the number of 82%, and then we're going to explain why it matters. So let's do a comparable, let's dig into the bottom line. Let's dig into their financial reporting and see where these economies in scale take place.

Where is the proof that this thing kind of gets more efficient as it grows? Here we go in the year ending January, 2017 operating expense to sales with 79%. The same as it was in 2019. So what they're saying here is basically the operating expenses to sales were 79% for two or three years running, but meanwhile, zooms gross margin increased from 79% to 82.

So their percentage of costs didn't change. They able to keep hold of that. So they delivered to more customers for the same rate, but the top line grew from 79 to 82 gross margin increased. This means. That just as they grow, they don't only make, uh, the total volume of profit is bigger, but what is actually it's percentage of revenue increases because they're able to control their expenses.

And I think what you will see here, this is because they're super focused as a company on one thing, video, super focused on being cloud-first so they can scale much easier. I have a great culture. They're retained people really, really, really well. So they're not turning customers, their greatest advocates that go out and market the company are their employees and their customers.

They are primed and ready for this sort of, uh, um, sort of it's a real rarity in business, which is, they genuinely just get better as they grow. This is truly rare. What is even rare is still is if you look at it, What is happening with people, product and promotion. They are also in extremely good shape.

So to sort of pull together the profit picture, strong, uh, freemium offering, uh, this is fantastic. They just give away their product and somehow they make money. This is fantastic. Um, you know, those large enterprise clients start with just a free trial or a freemium version. There are product for everyone, which is just wonderful.

It means billions of potential customers, and they just get more efficient over time. So they have it. That is the fourth part of a deep dive into the business. Uh, and the universe of zoom, uh, video. I hope you've enjoyed looking at how they make money because I got a ton of learnings out of this one.

Okay. So now it's time to do a recap. You have been sort of blitz if you will, with, uh, 12 different ideas around people, product profit and promotion. I think it is now the exercise of great discipline and simplicity. Let's try and pull it all together. ...