Zenefits is an online software-as-a-service (SAAS) business founded in 2013, by entrepreneurs with two laptops and a dream. Today the business has nearly 2,000 employees, $85mm of annualized recurring revenue and a valuation of $4.9bn. It’s core service offering is online human resources management that aims to automate and outsource all of the major administrative tasks of the human resources function of small and medium sized businesses. Some of the more notable products include payroll, insurance benefits, timesheet management, employment verification, employee onboarding and compliance. Today it serves nearly 200,000 employees across more than 40,000 businesses nationwide. It’s core service audience is the CEO, CFO or CHRO of a small to medium sized enterprise.
Zenefits has a very unique business model. Zenefits does not charge any fees to its customers directly for its service (for the most part). Instead it makes its money (about $450 per employee, per year) by serving as the broker of record (insurance broker) on any insurance that is bought through Zenefits. Prior to Zenefits, companies bought insurance through local insurance brokers that provided nothing more than free tickets to local sports games in return for the business. The insurance brokers get paid between 2% and 10% in commissions from the insurance carriers (think Aetna, Prudential, etc). Rather than provide you a couple of free tickets to a local game and a warm birthday phone call, Zenefits aims to provide its entire suite of services in return for the privelage of being named the broker of record (insurance broker) for the health insurance that a customer secures through the platform. The underlying premium paid by the customer, quality and terms of the policy and carriers are the exact same. In this model the value of the product to the customer is very high, while the perceived cost of the product is free.
From an operating model perspective, Zenefits distinguishes itself by utilizing two strategic design paradigms. One is product development through a “hub and spoke” model. They begin with the obvious (payroll, benefits) then try and offer an automated solution for every conceivable service that utilizes the same dataset. Once you enter an onboarding information at time of hire, they find ways to use that data to accomplish other tasks. Why should you have to enter SSN or DOB in a separate payroll onboarding form? Why should you have to print an ID badge by keying in employee name and date of hire? Zenefits takes in data once, then auto-fills and auto-populates that data to all ancillary services that it can help set up. By doing this, it creates immense value in the form of time saved for a customer and creates a “pull” for usage. While the brick and mortar human attempts to find a seat to a coveted baseball game to offer you for being a valued customer – at the same price and at the same time – Zenefits is constantly finding new “spokes” of HR related services it can offer you. This aspect of the operating model enforces, validates and embellishes the quality of the business model.
Another unique and highly strategic design paradigm within the operating model of Zenefits is that “Zenefits runs on Zenefits”. Many innovative companies must always ask themselves “what product should we offer next?”, “what are the pain points of using our product”, “how can we anticipate the customer experience of a proposed new product?”. Zenefits is able to answer these questions by simply running its own business on Zenefits. In fact, it is the largest company that utilizes the Zenefits suite of solutions. It is also able to anticipate design and usage challenges, see implementation hiccups live and explore new and tangential service/product opportunities by running its own business as an experiment in design and product testing. This is a truly unique element of the business.
By further ingraining itself with customers (by offering more and more services, with higher quality and reduced implementation hiccups – all of which is a by-product of the aforementioned aspects of its operating model), Zenefits is able to create an ever more effective business model. The product engagement created by more users switching from brick and morter management of HR and Benefits creates more and more opportunities to become the “broker of record” on an increasing amount of insurance being sold on its platform. I think this is a highly effective example of business and operating models working in tandem to create a sustainable and competitive edge.