After two-plus years of economic uncertainty, businesses continue to look for new ways to do more with their foundational operating systems, and the case for embedded payroll grows stronger.
Solution providers are listening by adding more services to their platforms. Bolstered by the success of embedded fintech, experts believe embedded payroll is the next big embedded offering, presenting a golden opportunity for solution providers to increase deal size, provide more valuable package tiers, and dramatically reduce customer churn. Read on or watch The Case for Embedded Payroll Webinar OnDemand to learn more.
Why Embedded Payroll? Why Now?
The world has changed over the past two years. We’re still feeling the effects of the Covid-19 Pandemic. Economic uncertainty is high, and we’re technically in a recession. And what do businesses do in times of recession? They start looking at their expenses, at their tech stacks, are start asking whether the solutions their utilizing are need to haves or nice to haves. Money doesn’t go as far as it used to so they look for ways to cut costs, reduce expenses, and the focus turns or at least should turn, to cross-selling and retaining the customers we have versus going out and trying to acquire new ones. It’s simply a matter of economics and opportunity cost. The fact is it’s more cost-effective to try and retain existing customers versus going after new ones.
SMBs Want More services in their operations systems
These additional services are exactly what we’re seeing and hearing from the market. SMBs are reducing their tech stacks and looking to accomplish more from their foundational operations platforms. Likewise, solution providers are adding more services to their platforms by acquiring adjacent solutions, partnering with solution providers, and even building additional capabilities in-house because they know the benefits. Not only does it increase their solutions’ stickiness, but it also increases deal size and annual contract value at a relatively low customer acquisition cost.
SMBs are adopting these additional capabilities at rapidly increasing rates. Of the more than 6 million small businesses in the United States, more than 2.5 million are using a vertical SaaS solution across virtually every industry. On top of that, VC companies are pouring money into these platforms to help solutions providers build more and more quickly. Are calculations estimate VC companies invested more than a billion dollars into vertical SaaS solution providers in 2021 alone.
Furthermore, these additional offerings are core to operating a business. Things like embedded payments, benefits, employee management, and, more recently, embedded payroll. Why? Because these things are core to business operations. They’re foundational and a natural extension of what many of these solutions provide to their customers, like time tracking, employee scheduling, and tracking vital personal information about their employees.
Embedded Fintech Success is Paving the Way
Bain Capital released a recent embedded finance report titled “Embedded Finance: What it Takes to Prosper in The New Value Chain.” In it, they highlighted a number of growing trends in the embedded finance space:
- In 2021, 5% of all financial transactions were facilitated by an embedded solution. By 2026, this will double to 10%.
- Incumbent financial institutions are threatened by this new value chain but can realize tremendous growth if they join in.
- Demand will continue to grow because businesses want more from their foundational operations systems, “better together.”
- Payments will continue to be the largest fintech service (“all software companies are payment companies”), but success in this area will lead to the growth of adjacent services.
We sat down with the author, Blake Adams, SVP at Bain Capital, to discuss the role embedded finance plays across multiple industries and why it’s become such an increasingly massive opportunity for companies. In addition, we asked him what’s driving the change towards embedded solutions.
Adams said, “There are a few drivers. The first is financial services just continue to come online and move from offline legacy processes to being digitized. The second thing is more and more software platforms really realize their right to win and convert and sell through some of these offerings because they know their customer better than any bank does. They have proprietary data and a ton of trust and credibility with their customers. We see this continuing to be a dynamic and part of a multi year, if not multi decade, generational shift. And lastly, I’d say is vertical maturity. Some verticals like E-commerce, health and wellness, food delivery, have very high penetration of embedded finance, while others, like real estate, are still in their infancy. But we expect to see adoption in many more verticals pick up steam over time.”
Embedded Payroll is Next
One company that’s experienced tremendous success in the embedded payments space, and has now moved to embedded payroll, is Toast, the all-in-one point-of-sale business operations platform for restaurants. Toast went the route of embedded payroll by purchasing a payroll and HR tech company in the summer of 2019. While marketing and sales efforts were drastically hindered by the Covid-19 Pandemic, in their Q1 2022 earning call, they talked about their payroll journey and how payroll has become a strategic pillar for their business. Their initial focus was selling payroll into their existing install base, and in year one were able to convert 15% of their roughly 62,000 customers to Toast Payroll. Through Q1 2022, they were attaching Toast Payroll on 30% of all new customer sales. They acquired more than 10,000 new payroll customers in less than two years. By rough counts, we conservatively estimate they’ve created a 20 million dollar plus product line in just over two years.
The Embedded Payroll Opportunity
With over a decade of payroll experience, 200k happy customers, $250+ billion in payroll processed, and an NPS score of 70+, we’re extremely proud of our success. And while 200k customers is an incredible achievement, there are over 6 million small businesses in the United States. We’ve learned that no two customers are exactly alike, and as much as we try, we’ll never know your customer’s business as intimately as you. That’s why we’re making our payroll APIs available to you. The same APIs more than 100 of the top SaaS solution providers have used via Gusto partnerships and integrations to grow the Gusto partner ecosystem.
We believe this represents an entirely new paradigm for businesses today. For years, SMBs processed payroll manually or used a generic, one size fits all type of software. And typically, this came with a less-than-stellar product experience and less-than-stellar customer support and service. Gusto’s success has already shown SMBs want and deserve simple, easy-to-use software tools to help them manage the growing complexity of running a business and, most importantly, save them time so they can do more of what they got into business to do. And they get world-class support along the way. Considering that SMBs are cutting costs by trimming down their tech stacks and looking for more from the operational systems they use most frequently, this is a fantastic time to consider something like this and what it could mean for your business.
With Gusto Embedded, you’ll create your own payroll solution, with an enhanced user experience that matches the look and feel of your existing solutions and tailored to your customers and your industry specifically.
With Gusto Embedded, you’ll create your own payroll solution with an enhanced user experience that matches the look and feel of your existing solutions and is tailored to your customers and your industry specifically.
In terms of how you measure the impact of bringing a payroll offering to market and how it would drive your business forward, there are four potential ways in-app payroll can benefit the business:
- Higher annual contract value (ACV) – when payroll is priced as an add-on
- Higher subscription tiers (MRR/ ARR increase) – when payroll is packaged with other ‘premium’ features
- New customer acquisition (new logos) – when payroll helps differentiate and convince new customers to sign up
- Higher lifetime value (LTV)/ increasing the LTV-to-CAC – when payroll customers continue to subscribe longer than non-payroll customers
And again, your customers are already paying for payroll somewhere; why not pay you?
How Embedded Payroll Works
You’ll build your embedded payroll solution by utilizing Gusto APIs to pull in customer information you already collect, develop your own UI to collect it, or choose from our library of prebuilt UI flows. Whether you want to go to market as quickly as possible or build a more tailored payroll solution, we work with you to find the right path for your business.
All the relevant data you collect, like employer and employee info, hours worked, and more is then passed securely to Gusto, where we handle the backend payroll calculations, tax withholdings, and tax filings. All the tricky stuff associated with the more than 16k tax rules and 2k tax jurisdictions is handled by Gusto.
We then train your teams to handle tier-1 support, the easy stuff like password resets, how-to basics, and, most importantly, how to route the trickier questions to our Gusto support teams. So in as little as five months, you can design, build, train, and go live with your own payroll solution.
Your entire platform benefits. From a product experience perspective, this is a custom solution built specifically for your customers with the same look and feel as your existing solution. The customer experience is improved as your operational system serves more needs for your customers without hopping around different platforms. And you own the economics, leading to increased deal size, increased adoption of premium package tiers, and improved customer retention.
Learn more about Gusto Embedded Payroll, including a Gusto Embedded Payroll demo by watching our on-demand webinar, The Case for Embedded Payroll.