Slack Business Model | How Does Slack Make Money?

Slack is a team communication application that offers real-time chat, archiving, and searching for modern teams. It features one-on-one messaging, private groups, persistent chat rooms, direct messaging, and group conversations arranged by topic.

Slack operates on a freemium model, allowing users to upgrade to a paid service if they need more usage or advanced functionality. 

The slack business model relies on a freemium strategy coupled with direct sales teams to target enterprise customers with recurring revenue above $100,000. 

What is Slack?

Slack is a team communication app that enables users to communicate with their team members via chat, phone, or video.

You can form groups called channels to work together on a project or exchange information about a specific topic. You can access Slack on both desktops and mobile devices.

The business model of Slack is to charge consumers a subscription fee each month. The company offers three different plans. Business owners and entrepreneurs can choose from small, medium, and large plans.

The company was founded by seasoned entrepreneurs in 2013 and immediately became a hit among consumers. Slack reached a valuation of $1.12 billion eight months after launching. Slack’s ongoing growth resulted in the company going public in 2019.

How Does Slack Work?

SLACK (Searchable Log of All Communication and Knowledge) is a cloud-based messaging application that allows users to interact privately or in groups (called channels).

You can use Slack on both desktop and mobile devices (on Android and iOS). This application is intended mainly for enterprises to facilitate and organize conversations between teams and departments.

The channels can manage teams, projects, office locations, and everything else related to business.

Furthermore, users can collaborate on files. Similarly, the Slack app stores and indexes all interactions (between teams). Furthermore, if you aren’t comfortable chatting, Slack enables you to call those in your network.

Slack also allows third-party software integration. Some examples of these applications include Zoom, HubSpot, and Trello.

Organized Conversations

A Slack channel is where information is routed. It is possible to build an unlimited number of channels. A channel is designed based on an organization’s size, the number of teams, and the nature of the project.

Secure Working Environment

Slack offers two-factor authentication for account security. The user will be able to access the system even if he forgets his password. Moreover, SAML-based SSO allows for safe access via a third-party authentication provider.

Trackable History

Slack keeps track of all work and allows access to previous posts on channels. Slack channels are archived or deleted, but published material remains accessible in the future.

Audio And Video Calls

You can also make free audio or video calls to up to 15 people at once with Slack! Making a call is easier because you no longer need to switch between Skype, Google Hangouts, and Slack.

Integration

Slack’s integration capabilities make it different from other online instant messaging and collaboration platforms. Slack lacks some project management features, but third-party apps like Google Drive, Dropbox, and Twitter can be linked to it to turn it into a full-featured management tool.

Bots

Slack uses a variety of bots to accomplish a variety of tasks. It is possible to use a Slackbot to keep notes and remind you.

DiggBot is a service that assists a channel in finding news and websites that are interesting. There are also several other Bots. What’s even more exciting is that you can design customized Bots!

Custom Shortcuts And Commands

A custom shortcut is a keyboard shortcut or other command created in addition to those already established.

Slack Business Model

Slack operates on a freemium model. A free version of the application is initially available. Users can then upgrade to become paying clients if they want access to more advanced functionality. 

A freemium model is used along with a direct sales team to acquire premium and even enterprise customers.

With over 500,000 organizations using its free membership plan, and more than 575 organizations paying an annual fee of $100,000, the company has more than 500,000 organizations in its membership.

Slack’s revenue in 2019 came from other paying clients, which accounted for over 40% of its total revenue.

How Does Slack Make Money?

Slack makes money from three distinct premium subscription plans that target small, medium, and enterprise-sized businesses.

As part of its consumer outreach, the organization uses a freemium business model. The Slack application and its application extensions are available to anyone who wants to try them out for free.

Slack’s free users can access some ecosystem elements but are limited in the number of messages and files they can share.

Users must subscribe to one of Slack’s three premium plans to gain access to some of the more advanced features. 

A grid can be divided into three types: Standard, Plus, and Enterprise Grid.

A monthly fee and a per-user fee apply to plans. An example would be the Standard plan, which is $6.67 per month for a newly added user.

You can have unlimited phone and video conversations with the Premium plan, keep track of your identity and get a team of dedicated tech support personnel.

Slack’s customers include Shopify, Airbnb, Lyft, Oracle, and Electronic Arts. Currently, Slack has 110,000 paid customers.

A centralized workspace is provided by the Free, Standard, and Plus subscriptions for smaller organizations. An enterprise grid service is a subscription service designed for large organizations.

The platform connects workspaces and channels, improves data security, and facilitates integration.

The majority of Slack’s revenue comes from subscriptions to its premium services. Slack subscriptions can be charged annually or monthly, depending on a company’s number of users.

Who Are Slack’s Paid Customers?

There are users of all shapes and sizes using Slack, who work in many different sectors.

All sizes of organizations use Slack:

• Entrepreneurs,
• The freelancers,
• Small businesses in the early stages of growth,
• The multi-national corporations.

Is Slack Business Model Sustainable?

The popularity of Slack has exploded among organizers in recent years. The simplicity of the Slack platform’s communication capabilities and commitment to data security make it an ideal platform for coordinating organizational operations. 

Moreover, Slack collaboration keeps information away from emails and Google Docs. This can boost productivity.

Slack does, however, have some disadvantages, just as every coin has two sides. It is an adequate chat room for businesses, but it may be difficult for those who are not tech-savvy to get a sense of its working environment at first. 

Furthermore, Slack is not the best tool for facilitating conversations and partnerships involving large numbers of people. Yet, it accomplishes as much as possible. Workplace culture is transformed from a traditional one to an unconventional and fascinating one.

Everyone who has an interest in this firm is intrigued by its financial component. The company is valued at about $17 billion, but its primary concern is cost. 

The company’s total operating expenses are around 49 percent, which raises concerns about its viability.

It is difficult to predict if the company will be profitable shortly because it spends a significant portion of its revenue on marketing and sales. 

Many analysts see this loss as an investment for the future, provided users remain loyal and churn rates remain low.

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What is the Funding and Valuation of Slack?

Crunchbase reports that Slack has raised $1.4 billion in venture capital funding throughout 12 rounds. Slack shareholders include Accel, Andreesen Horowitz, Social Capital, Google Ventures, Kleiner Perkins, and General Atlantic.

Slack announced its June 2019 IPO as a direct public offering (DPO) instead of an initial public offering (IPO). On the other hand, an IPO involves investment banks or brokers assisting with the deal’s underwriting (i.e., selling stock to investors).

A DPO approach was chosen to avoid dilution of current shareholders. The company did not require additional funding but wanted access to the capital markets if it needed it in the future.

Finally, Slack shares will not be subject to any lock-up periods, enabling existing shareholders (including investors and employees) to sell their stock instantly. IPOs usually include a 90-180-day lock-up period.

Slack is estimated to be worth $27.7 billion by Salesforce at the time of writing. Salesforce has not yet decided if Slack will remain a public company.

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What is the Revenue of Slack?

Slack reported revenue of $630.4 million in 2019, up 57% from 2018. The business now has more than 110,000 paying consumers (representing a 25 percent year-over-year increase). Slack receives annual payments of more than $1 million from 70 of these clients.

Slack Growth Story

Slack was founded by Steve Butterfield (CEO), Eric Costello, Cal Henderson, and Serguei Mourachov in 2013. The company’s meteoric rise to fame can be appreciated by studying its spokesperson, Stewart Butterfield.

David Butterfield immigrated to Canada in the 1970s, avoiding a North Carolina army facility where he would have been trained to fight alongside American soldiers in Vietnam. He met Norma in the fishing village of Lund, British Columbia, and they moved there to join a hippie commune.

Stewart moved his family to Victoria, where his father established a successful construction business when he was five. His name is Dharma, a Hindu word that means virtue.

When he was twelve years old, he changed his name from Dharma to Stewart. A graduate of the University of Victoria and Cambridge University, Butterfield moved away from computer science to study philosophy. Meanwhile, Stewart began tinkering with computers and self-taught himself how to code.

Butterfield launched a gaming company in Canada at the turn of the millennium, when the world was hungry for technology companies. A multiplayer fantasy game based on creating characters and exploring an infinite realm (similar to Minecraft), Game Neverending was an online multiplayer game.

One of the biggest fans of the game was a young programmer from London named Cal Henderson. He relocated to Vancouver so he and his wife, Catarina Fake, could collaborate on the game together.

The game was doomed by 2004. The team had designed a platform for users to submit and share photographs as part of the game. The team hurried to create a prototype and present the tool the day before a major technology conference in San Diego.

Flickr.com was one of the world’s first venues for uploading and sharing pictures based on that demo. The platform’s emphasis on open-source software also provided users with the ability to customize Flickr as they wished.

The social network attracted millions of photo users each month, making it a global phenomenon. Flickr was sold to Yahoo for about $25 million one year later. The technology industry at the time was almost nonexistent, so the team was forced to sell the service to survive.

Butterfield was responsible for all development activities for Flickr while working for Yahoo. As with any big firm, the problem was that he had no easy time competing for scarce development and financing resources.

Several Yahoo teams also wished to exploit Flickr photos for their product development, which slowed Flickr’s progress.

The following year, Butterfield (along with Fake and Henderson) moved out of Yahoo to start a new company. A game called Glitch was to be developed by the company Tiny Speck this time.

The website describes Glitch as a period of disempowerment where the world shrunk.

Things fell apart, the center could not hold, and what became known as “glitch” – the significant risk of disempowerment – occurred.

Accel and Andreessen Horowitz led the company’s seed round, which raised $1.5 million. Butterfield was acquainted with Bradley Horowitz during his time at Yahoo as an executive responsible for the company’s acquisitions.

Two more rounds of funding were raised by Tiny Speck in 2010 and 2011. This raised the amount to $17 million.

The glitch was also introduced into beta testing two years after the team began development, making it available to the general public.

A series of unsuccessful attempts to market Glitch’s products and subsequent withdrawals led to Glitch’s closure in November 2012.

The company claimed it had been unable to acquire a large audience for its products, forcing it to close.

Fortunately, the story does not end here – once again. Some of the corporation’s cash reserves were retained from previous investment rounds. More importantly, however, they possessed something of much greater value.

Tiny Speck’s engineers designed an in-house communication application because its employees were distributed geographically. Butterfield eventually thought it would be worthwhile to market it to other firms after becoming a part of the team’s daily activities.

Tiny Speck began testing the product that would become Slack with 45 startups in May 2013. The public launch of Slack occurs in August.

Over 8,000 businesses signed up for Slack within 24 hours of its debut. Tiny Speck officially changed its name to Slack Technologies in August 2014.

A year later, Slack was used by more than 140,000 users daily. Two years after its inception, the number reached 2.7 million. Furthermore, users spend more than ten hours using Slack every day.

Slack has become the quickest unicorn in startup history with those kinds of numbers. Approximately eight months after the company’s official launch, its market value reached $1.12 billion.

Slack grew in this unusual space in part due to word of mouth. Existing users immediately began suggesting the tool to their friends and family, accelerating adoption.

Slack’s meteoric growth was also due to its ease of use and intuitive interface. Slack is available for free and does not require integration with a company’s IT infrastructure.

The Slack platform continued to grow throughout the years, adding new features (such as the Slack bot) and users. The company’s continued expansion led to its first public offering in June 2019. Slack employs over 2,000 people in 19 different countries around the world.

Slack’s growth accelerated in subsequent quarters, but the business ultimately fell short of investor expectations. Their business expanded ‘just’ 50 percent year over year during the first quarter of 2020 (compared to Zoom’s 169 percent growth during that period).

Slack’s performance was adversely affected by acquiring its largest competitor, Microsoft (and its communications platform Teams). Microsoft may engage in anticompetitive behavior, according to a complaint filed by Slack with the European Commission in July 2020.

Butterfield and his crew realized that fighting against the big boys would remain an uphill battle at the end of the day. Eventually, the founders of the company agreed to talk about acquisition.

Salesforce announced in December 2020 that it would acquire Slack for $27.7 billion in its entirety. Salesforce would be the clear runner-up in the enterprise software market, second only to archrival Microsoft.

Slack employed more than 2,000 people at the time of the acquisition. The company operates from 18 locations worldwide.

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