What is Embedded Payroll? Embedded payroll allows SaaS platforms to custom build a payroll solution within their own app and offer customers a seamless, time-saving, all-in-one-place way to run their business.
Today, all-in-one is what many small business (SMB) customers want. That’s my clearest takeaway from the SaaS 3.0 Summit earlier this month. Based on the number of embedded finance products offered by the average SaaS 3.0 company (98% offer at least one embedded finance product and 65% offer three categories of embedded finance products), it’s clear that tech leaders don’t make this big of an investment in embedded fintech without matching demand.
During the event, I spoke with Doron Friedman, the Chief Innovation Officer at SpotOn, a point-of-sale solution for SMBs, about their reasons for adding embedded payroll. Over and over he came back to the importance of deeply understanding your customers’ needs and challenges in order to build embedded finance products that actually solve their pain points.
The virtual event was driven by data from a recent survey of SaaS leaders called SaaS 3.0: Beyond Subscription-based Revenue. The report provided some interesting insights on embedded payroll:
- Adoption: The data show that when SaaS applications offer embedded payroll, on average 71% of their customers adopt in-app payroll; the highest for any category surveyed.
- Revenue Realized: SaaS providers offering embedded payroll responded that the revenue lift from payroll averages 41% of annual contract value (ACV).
- Future Growth: The report revealed that embedded payroll was the highest priority roadmap item (among embedded finance categories surveyed) for SaaS 3.0 companies to offer beyond their next 12-month plans.
Based on the data, revenue growth was the primary driver for SaaS 3.0 companies that offer payroll, but churn reduction was a top driver for embedded payroll vs other embedded finance products.
Who needs an embedded payroll solution?
Nearly every business needs to pay employees. In my chat with Doron, he shared his opinion that providing embedded payroll solutions tailored to their customers will increase revenue, streamline operations, and, most importantly, enhance the customer experience.
He talked about how small merchants often struggle with complex time tracking and payroll processes, leading to wasted time and errors as well as a disjointed experience between SpotOn and payroll integrations. Last year SpotOn announced Teamwork, enabling comprehensive labor management (think timeclock, shift scheduling, roles, wages, and more) integrated with the real-time sales data from the POS. Teamwork saves up to 20 hours a week on labor-management tasks for managers. SpotOn built payroll within Teamwork to seamlessly sync hours and tip allocations, speed payroll processes for their customers, and ensure tax compliance and filing accuracy.
“We always speak to our customers, and we found out that over 50% of our clients have payroll issues and must make corrections to payroll. It’s a big headache for these customers.”
Doron Friedman, Chief Innovation Officer, SpotOn
At Gusto Embedded, we hear these same challenges across a range of industries. When we talk to small business owners, most say the most stressful day is when they hire that first employee because they are now directly responsible for getting payroll right and ensuring their employees get paid on time correctly.
For the average SMB, payroll processing is complex and time-consuming, with compliance requirements adding to the burden. At Gusto, we already serve over 300,000 SMBs. However, we recognized that SaaS companies like SpotOn want to offer more tailored solutions within their existing solution. That’s why we launched Gusto Embedded: to empower other software companies to offer payroll without the need to build it from scratch.
Why embedded vs integration?
Historically SpotOn already had an API integration with Gusto, where the two systems synced employee data back and forth. So I asked Doron point-blank why they wanted to make the additional investment to move from an integration to embedded payroll.
“We tried to make the integration as seamless as possible, but it’s not seamless. And it doesn’t answer the needs of our customers… They want everything to be on one platform not only because they want to see everything in one place but also because they want to move faster, be more accurate, to avoid the sync issues that inevitably come up.” – Doron Friedman
Doron highlighted three key reasons SpotOn decided to invest in embedded payroll:
- Embedded improves the user experience: Integrated payroll eliminates the need for multiple logins and data copying, reduces errors, and provides merchants with a holistic performance dashboard to run their business better. Based on his conversations with merchants, this is what they want.
- Embedded makes the platform stickier: In a nutshell, serving more customer needs *well* in one platform decreases the chances they churn. In this vein, Doron mentioned other embedded finance products like cards and loans, but also scheduling, as other products that all help solve more pain and keep customers satisfied with SpotOn.
- Service mentality: Doron made clear that things like payroll compliance, which underpins payroll onboarding and the customer support motion, are not things he wants to develop expertise in. But with the assistance of the right partner (Gusto Embedded in this case for payroll), SaaS companies focused on “lifetime value and customer happiness” can find a lot of benefits in embedded finance.
I couldn’t agree more. The next question we often get is ‘how?’ When considering payroll, I advise SaaS leaders to consider three key factors to drive adoption of in-app payroll:
- Differentiation: Identify unique selling points that set your solution apart and align embedded payroll with your company’s overall strategy.
- Upselling existing customers: Figure out how you will sell embedded payroll to your current customer base, strengthening relationships and driving growth.
- Gross margins vs. net margins and LTV: Consider short-term revenue improvement and long-term profitability. Payroll is a strategic priority for businesses focused on net margins and customer lifetime value (LTV).
Embedded payroll as a strategic priority: helping people
As we got deeper into the conversation, Doron brought the talk of technology and embedded fintech back to people. Namely, the employees that are critical to merchants’ success.
He also mentioned earned wage access as a new, high-demand opportunity not because it represents fintech innovation, but because it is a major pain point for employees: they earn their wages and tips each shift, but right now they can’t access what’s theirs.
In the end, I was most struck by Doron’s emphasis on the desire to be the main point of contact for customers with questions not just about the technology, but about their business. I love how he’s bringing a hospitality mindset to hospitality technology for SpotOn.
Watch the replay here. Doron’s advice for anyone considering embedded payroll (~18:00) is worth listening to.
