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The Employee Opportunity: Building Products for Your Customer’s Employees
Founder and Partner, Tidemark
Extending to your customer’s employees is both logical and also a sneaky-big (dare I say, sneaky-enormous) opportunity for a vertical SaaS vendor (VSV). Similar to supplier extensions, you can mandate employees engage with your workflow—the merchant is paying the employee, after all. Similar to extending to consumers, the potential monetization opportunity is enormous, since small businesses employ nearly half of the US employee population. It combines the best of both worlds.
Employee extension is typically done for hourly front-line/deskless workers like restaurant servers or field technicians. These individuals are almost always underserved by existing software, and there is a huge opportunity to build products just for this cohort. To sell to these individuals has a dual purpose:
For the merchant, labor is oftentimes the largest expense. Finding and retaining labor is also one of the biggest challenges SMBs face. Improving this aspect of their business can be key to building strong margins. Additionally, the employee is the face of the merchant, and the primary driver of the consumer experience. Ensuring employees are well-equipped, well-trained, and fairly paid to do their jobs can make all the difference.
For the VSV, this is a big market! SMBs employ 45% of US employees and aren’t able to offer many of the bigger company benefits. Because so many of these employees are underinsured and underbanked, an employee extension is not only profitable but often a welcome strategy. In addition, the potential to launch a talent network is both a structurally advantageous and highly lucrative opportunity.
All of this sounds great, but as with all things that sound too good to be true, the challenge lies in actually executing it successfully.
How to Extend to the Employee
In previous essays, we argued that there were four steps to extend through the value chain:
- Help your merchant customer with the key job to be done with the target stakeholder (in this case, the merchant’s employee).
- Look for merchant-side network effects, which are often to be found in aggregating scale or data sharing.
- Land a wedge offering with the target stakeholder (e.g., employee) at the end of the merchant workflow.
- Build a two-sided network, if the market structure is favorable.
When extending to the employee, these same steps are taken, but in a slightly different order.
#1 Help the merchant with the key job to be done with the employee
There are a few jobs that a VSV can solve for merchants:
Recruiting: In good times and bad, recruiting is always the primary challenge for small businesses. In many verticals, the average worker tenure can be as low as five weeks. Even when the labor shortage abates, recruiting is a treadmill that never stops. Beyond that, because you are the system of work—shift scheduling, HR system—you know what types of employees merchants need. Some startups are now auto-generating job descriptions and ads on the network and playing the role of the recruiter/ talent sourcer automatically.
As we discussed in Vertical SaaS truisms, oftentimes the hiring manager is deskless for most of the day (and so is the applicant), so traditional corporate recruiting software doesn’t get it done. Solutions need to be text-based, automated, self-service, and asynchronous where possible. These capabilities need to be embedded from the onset of applicant outreach and throughout the application process, interview scheduling, etc.
Team Management: The employee is the face of the organization. Making sure employees know when to show up and have everything they need to serve customers well is key to running a successful business.
We have found this usually starts with shift scheduling. A manager’s job is to make sure they have the right number and type of employees on-site at all times. This can be a chaotic time-suck for just a single location. That complexity is further increased when the workforce is mobile and the job sites change or multiply. A self-service shift schedule application where an employee checks in and requests changes is a strategic piece of technology. It will typically have access to employees’ roles, skills, route planning, and of course, calendars and time worked.
Having access to this data is also extremely advantageous for additional products down the road. Managing employees' time is not only a critical workflow; it also sets up a VSV nicely for strong payroll expansion. Likewise, over time this application can be a nexus for corporate communications, tasks management, training, incident reporting (spills/accidents), and overall worker management.
Getting team management right is high-stakes. Managing employees efficiently can dramatically decrease labor costs and increase profitability.
Compliance: If your merchant’s workforce is subject to regulation, compliance can also be a key value proposition. In many markets, managing contractors' and employees' certifications, insurance coverage, and training is a critical and time-consuming risk management activity. It can be mandated by regulatory agencies, or a condition for reimbursement by insurers and other third party payors. Tax authorities also play a role especially in places like Europe where fiscalization comes into play. Oftentimes in these cases, the VSV sells to the merchant and the merchant will mandate the platform down to their employees or contractors, decreasing your CAC.
#2 Land a single-player wedge offering with the employee at the end of the merchant workflow
Candidly, this can be as easy as requiring an employee to download an app to engage with merchant workflows, or even to get paid. It is much easier in comparison to other products, where your acquisition motion involves having to convince someone to try your product for the first time.
Persistent Employee ID: More than downloading and using the app, you want that employee to establish a persistent employee identification. You want them to set up an identity with the VSV that they can use and access even if they leave employment with the merchant.
If you are in the payment flow, this should be relatively straightforward. An employee will need to upload personal and tax identification information with the VSV to get paid, and the user account should persist for tax reporting. Likewise, a VSV can use the mobile number, which is a reasonably persistent communication channel, as the Universal ID.
Over time, the imperative for the VSV is to have a merchant’s employee maintain their work history, any employer-specific or generalizable skills and certifications, driver’s license (and DMV record), and required insurance in this persistent ID.
Merchant Objections: Of course, merchants may be threatened by a persistent ID because they don’t want employees to be contacted by another employer through their VSV. You need to be ready to advocate it as a benefit to the employee (access to credit, insurance, etc) and to the merchant (single click onboarding & offboarding, communication with past employees) as described below. You should also be prepared to set ground rules to ease these objections—for example, agreeing to not target current employees for jobs in the same region. This can be a difficult discussion, but it’s an important one to empower strong merchant and employee offerings, and business models for the VSV, as explained below.
Single-Player Employee Value Propositions: Many employees are underbanked and underserved, so a VSV can provide access to insurance and a number of financial services while creating lucrative revenue streams. Earned wage access is one compelling value proposition. It allows an employee access to wages that are due to them days or weeks ahead of time to help with near-term cash flow needs. Our experience has shown that earned wage access can often provide a VSV 100-150 bps for cash advances.
Because the VSV is in the funds flow, over time there may be an opportunity to become an employee fintech (or partner with one) to handle much more than payment advance. A VSV could give access to banking, savings, 401k, tax, and bill pay services.
Hourly workers are notoriously underinsured, so affordable health care pooled across a collection of merchants can also be a strong offering. Healthcare insurance is a $1.1T market. Since small business represents 45% of employment in the US, this offering alone is big enough to dramatically increase TAM for the VSV.
Personal income tax can also provide another source of income for both the employee and the VSV. Many hourly workers should expect to receive a tax refund rather than a liability. By helping an employee file their taxes in a low-friction fashion (likely with the help of a third-party tax software provider), a VSV can make sure that the employee gets access to these refunds. Further, a refund anticipation loan is another well-understood product, if somewhat controversial given bad precedents around aggressive pricing.
To bring it full circle, if a VSV establishes a persistent relationship with the employee, it can also provide functionality for the employee to apply for other jobs or passively recruit. The VSV has the employees’ job history, certifications, etc.—all the necessary components to provide the employee with a one-click apply experience.
#3 Look for merchant-side network effects in aggregating scale or data sharing
There are opportunities to leverage merchant density to build multi-merchant offerings. Salary data can be used to create a hyper-local compensation benchmark, which is highly valuable to merchants and employees. On the insurance side, an opportunity exists for healthcare and Workers’ Comp pooling to negotiate for better rates.
Benchmarking also extends more broadly to operational processes. Because many VSVs manage core operational workflows, they are in a position to provide benchmarks on key metrics. They can tell merchants what the average provider in their area does in terms of operational efficiency.
Jason Randall, president and CEO of AppFolio—which provides business management solutions to the real estate industry—reports:
“Customers rely on us as their go-to experts on market trends and culture, and are always asking us about best practices in terms of staffing and recruiting, building a great culture, and running an efficient operation.”
Merchant-side scale can also be helpful in building up recruiting assets. At a certain level of density, sell-side job listing directories can be effective. While they may not have a large consumer following, they can gather traffic via SEO and word of mouth.
Franchises are a special form of merchant-side scale and density. They provide opportunities to create “alumni databases” with review data, prior work history, and other relevant information. A VSV can help a merchant to reach out to the best prior employees at either the location or franchise level. This is particularly important in highly seasonal verticals like retail, or in situations where employees are on the move. Think of The Gap’s massive spike at the holidays, or a Subway employee that needs to move but wants to work at another Subway in their new location.
#4 Build multi-player employee value propositions and a two-sided network
With the benefit of a persistent employee ID, and as a result of high employee turnover, a VSV can start to engage with a meaningful percentage of a local market’s employees even without a dominant merchant market share. As a result, we’re optimistic that there are strong multiplayer employee offerings that could be compelling.
Multiplayer Onboarding: One-click onboarding is one of the most promising multiplayer employee offerings. Most merchants report that onboarding a new employee takes two hours of administrative time on average. If a VSV has an employee’s persistent ID with tax and personal information, it should be able to empower “one-click” onboarding. Even before a VSV reaches significant local employee density, it can provide a self-service onboarding experience to reduce the administrative burden. We are starting to see the most progressive VSVs offer these onboarding solutions to strong merchant demand.
Single → Multi-Player Recruiting: A job board is more like an ad network than a traditional marketplace, in that job boards often buy and sell applicant traffic to other job boards by showing competitor’s listings. This nuance enables a VSV to provide recruiting value propositions at low employee density, and scale its offering as employee density increases.
Data-Powered Search: A VSV can start helping a merchant source candidates once it has a minimal viable set of employee data. Because a VSV knows which employees get hired, do well in their organization, and retain the longest, a VSV can use employee attribute data to help a merchant find similar candidates on third-party job boards. Indeed’s early strategy is an indicative if not perfect precedent: in its early days, Indeed came to life by providing meta searches on top of existing job boards. Given all of its assets, a VSV could provide a much stronger data-driven search capability.
3rd-party Supply: As a VSV works to build employee density in a market, it should leverage third-party supply along the way. Because the VSV controls the job listing distribution, it should have the flexibility to post job listings to its owned assets—city level directories, the VSV employee app, and alumni databases—as well as third-party.
ZipRecruiter’s early days are a great precedent (see my interview with CEO and founder Ian Siegel). ZipRecruiter started out as a distribution tool to third-party job boards, but it conditioned its customers to start paying for additional applicant traffic with a “boost” functionality that charged $100 to promote a listing. It sourced candidates for its boost function first from a pool of candidates that had responded to other employers’ postings but weren’t hired—these candidates were in the market for similar roles, so they tended to respond to proactive outreach. ZipRecruiter also bought third-party traffic from sites like Indeed to further augment its candidate flow. Over time, ZipRecruiter decided to spend over $100M to build its consumer brand, but that happened much later in the company’s evolution.
Two-Sided Talent Marketplace: We have yet to see a VSV go all the way to build a fully integrated talent network, but we think it is only a matter of time.
Considerations and Opportunities
Factors to mitigate
Both Job Listings and Job Seekers Multi-Home: Few job boards have high-growth organic traffic streams, so job boards act similarly to ad networks: syndicating their job listings to other job boards for reach, or bidding heavily with paid search to buy candidate traffic. Because many job listings are hosted across multiple sites, job seekers don’t always see significant differentiation and will simultaneously use multiple sites. These two factors allow a job board to aggregate job listings and candidates at a smaller scale, but makes job board margins challenging.
Factors to maximize
Local Markets & Verticalization: A VSV has a structural advantage, in that it is inherently local. This allows a VSV to build up meaningful density on both sides on a local market basis.
On the other hand, hourly workers are likely to only be partially verticalized. For example, a significant population of restaurant workers would also be qualified and open to jobs in the retail stores. As a result, a VSV should focus on verticals or positions where the workers are not highly fungible.
Magical Consumer Experience: Being privy to workflows, data, and identity with both employers and workers allows a VSV to really shine in terms of the consumer experience. The focus is to make the application experience “magical” for the worker. One-click apply (e.g. Indeed), always in-market, industry credentials, prior art portfolio (e.g. Casting Network), one-click onboarding (e.g Deputy)—these all can be value propositions that make the recruiting process special for a candidate.
In terms of team management, a VSV can use software and data to make employee contracting, onboarding, and engagement with a workplace frictionless. Taken to an extreme, this experience could approach that of the gig economy. Like an Uber worker, an employee can make herself available for short periods of work where she can flag availability, immediately receive work, and have everything she needs to do the job well.
Some great examples might be SurveyMonkey & Qualtrics, who started out with survey tools and built a panel of respondents as “part-time employees.” Similarly, many clinical trial software companies provide tools for clinicians to run their trials, but also panels of patients for said trials. Over time, the economics of the panel can subsume the software itself.
An employee extension strategy is a natural move for a VSV to make. By building products that serve their merchants’ employee population, they can create a win-win scenario that will allow the VSV a larger TAM while helping their merchants have happier, more successful employees. This strategy is additionally beneficial because it’s natural, and something that merchants will generally welcome. It is that rare case where every single party benefits. VSVs get a new, profitable business line. Merchants lives get made easier with a more engaged and stickier workforce. Employees get access to a range of services and products that they may not have had before.
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This chapter is part of:
Extend through the Value Chain
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