Slack Business Model & Revenue Model to consider for own startup

The Slack business model is uniquely inspirational in the way the business originated and how it embeds a freemium business model. Slack’s co-founders experienced first-hand all the twists and turns of the IT industry. 

• The times of the dot-com bubble when any digital startup was not investable. 
• The times when they had financing in excess but there appeared to be no market. 
• The times when the technology around the idea wasn’t there yet. 
• And finally, the times of development focus shift: from idea-driven to one based on solving user problems and then to data-driven. 

Slack’s cofounders managed to excel in repurposing existing failed products.

•  Artifact slots from a failed game became Flickr,
• An internal communication tool from failed Glitch became today’s Slack. 

And this is quite a valuable and cost-efficient lesson from the Slack business model already. After all, these days almost every business owner has a scraped product just sitting there. What if it can be repurposed into a business like Slack that generates today $1.5 billion in revenues in 2022? 

Moreover, Salesforce acquired Slack for almost $28 billion in 2020. It made Slack the most expensive subscription software acquisition ever. Talking of a freemium business model gone right! 

In this blog post, we’ll look at the way the Slack business model and the way it manages to balance free and premium within it. Then we’ll break it down on the business canvas. 

Slack Business Model Development

3.5 years – that was the time the Glitch team worked on Slack’s prototype.

Around 1 more year – that was how long the Slack team worked on the design and code base improvement.

Surely, there is that factor that the co-founders are all tech guys. However, this experience from the Slack business model highlights two important lessons. 

• One is about moving away from idea-driven to user-problem-based development.
• The other one describes one of the drawbacks of the freemium business model. Understanding it can truly set you up for success. 

From idea-driven to problem-based development

When one thinks back to the ‘traditional’ development times, one cannot disagree with the words of Slack co-founder Stewart Butterfield. 

“But in the normal process of software development, there’s a huge amount of ego and speculation. So when you’re arguing with someone about whether this feature is a good idea or not … there’s a lot of speculation like, I think this could be really valuable for someone. Whereas when we were building … proto Slack, …, it was whatever problem is the most irritating.”
Stewart Butterfield

At the time, Stewart Butterfield was a part of the team working on a multiplayer web game Glitch. For internal communication, they used the IRS. A sort of old-days  ICQ type of thing. But it had several very annoying issues:

• Using it required both users to be online. If they were not online, you could not send a message. It was aggravating;
• Once the ability to send messages offline appeared, messages started piling up on the server. Considering it was all work-related communication, the inability to search was the next most irritating issue.
• Then there was no convenient interface to work with that on iPhone. For many coworkers, it was a really annoying issue. So the team built a front end to view messages. 
• Once there was a nice front end, they could access message logs but could not post anything. Yet, another problem to fix.

And this process also is a sort of prototype for today’s MVP. 

Slack and modern MVP process

Here is how the iterations were handled according to Stewart Butterfield : 

“building [a feature] …. that we just absolutely can’t stand [not having], we would address that with a minimum amount of effort and… let it cook for several months …[to gather] a lot of real-world feedback or when there was a problem [to fix or debug].”

So, detect a problem then develop it with minimum effort, roll it out to gather feedback, and fix it if need be. Then repeat. 

In 2014, Slack – “Searchable Log of All Conversation and Knowledge” – was released to the world. To note, the idea-driven development was not rendered obsolete. It just went dormant until data gathering and processing capabilities upped a notch giving rise to data-driven development. This way. it is not egos or charismas that determine what feature is worthy – it is data trends and quantifiable metrics now. Startup Services incorporating MVP approach with lean development and analytics are essential for startups today.

Freemium Business Model

The freemium business model emerged in the 1980s. However, the term was coined in 2006. For the software industry, freemium was a way to go from the start. Freemium means that basic services are free, while there are also premium/paid features, services, or subscriptions. 

Why did it develop this way? Software and technology needed to be adopted to gain a sizable market. The cheapest and fastest way to do it is to start for free. Customer acquisition costs are often the largest expense for companies. To circumvent it, companies would use free tiers to “lure” customers in. Of course, to make revenues, free tiers must be justified by premium ones. And here lies the main struggle of the freemium business model: maintaining free-tier clients and ensuring a healthy percentage of paying customers. 

Slack and Freemium Business Model

Slack was started by the same group of people who worked together at Yahoo, two failed games, and Flickr. They are Stewart Butterfield, Eric Costello, Cal Henderson, and Serguei Mourachov. Given their background, the freemium business model was a natural choice. 

Here is the struggle in numbers from 2024 Slack stats:

• Number of daily users – 38.8 million
• Number of organizations – 750,000 
• Number of paying organizations – 200,000

Surely, Slack is making it work. Slack manages to have 26% of the paying users out of its overall user base. Yet, in 2022 it had to increase the price on its plans to improve its balance sheets. And after all, the development process is constant so eventually when the product gets elaborate, price must go up.  

The number 26% for Slack is highly contextual. Slack maintains an expensive infrastructure and development effort. Overall, this conversion rate might be between 1 to 5%. It can be on the low end if your business has high lifetime value. It should be 5% if your business is less long-term oriented.

If you find this drawback too unappealing, you can consider other business models. For instance, a subscription business model like Netflix. Netflix has only paying users, and subscription on a recurring basis generates a stable and predictable source of revenues. You can check out this and other business models in the article Top 10 Business Models to Consider for Your Startup.

Slack Business Model & Revenue Model

Let’s look at the Slack Business Model canvas in detail.

Value Proposition of the Slack Business Model

Considering the freemium business mode, Slack provides varied value to its ‘free’ and ‘premium’ users.

For free-tier users, Slack offers a cloud-based communication tool. It limits the log of messages and a number of integrations. In addition, it is possible to have 1:1 video calls on a free tier. The group calls are possible on a premium plan.

For premium users, Slack offers more advanced features and no limits on the message archives. Premium users can get a higher number of integrations. Plus, enterprise-level users can even request customizations. In addition, security is a big bonus for premium users. It spans the ability to verify people who can access the company’s information, devices they can access it from, and more. 

When the Slack business model incorporates the freemium business model, technology adoption plays an integral role. The free tier encourages companies to try using Slack. Inevitably, teams start recognizing advantages and the needs of teams become more complex. That eventually leads to upgrading to a premium subscription. 

In the table below is the quantifiable value Slack brings to some of its enterprise-level users:

The acquisition by SalesForce expanded the market for Slack. SalesForce provided seamless integration of the SalesForce data with Slack channels. This move brought much higher adoption of Slack by sales and customer service teams. The value this integration brings amounts to savings of $2.6 million in faster deal closure and customer service tickets for the sales team. 

Channels

• Within the Slack business model, the value is distributed directly through Slack’s website. 
• In addition to this, there are mobile apps available in the Play Store, the Microsoft Store, and iOS App Store. 
• Slack is available as a desktop app. It has download versions for Windows, iOS, and Linux.
• Moreover, users can be acquired through integrations.

Customer Segments

From the point of view of value proposition, there are two major categories:

• Premium users which are large enterprises and tech companies. This segment is the primary source of monetizing the value and drives the development of newer features.
• The free segment is small startups and other organizations that need to manage knowledge within. They can be educational institutions, non-profits, and so on.

Customer Relationships

Whenever there is an issue, customers can reach out to a help center. Also, Slack maintains high levels of self-service capabilities. In addition, there is the Slack community. It is available locally and offers meet-ups. People can gather around and discuss different ways to use Slack for developers, designers, beginners, and others. Overall, the focus is on smoother workflows, integrations, and sharing expertise.

Key Resources of the Slack Business Model

• Technology and people around it;
• Brand;
• Partnerships.

Key Activities

To illustrate, below is the history of product innovation at Slack indicating that the primary activity is product development, maintenance, and innovation.

User Acquisition is yet another big-ticket direction. The customer success team, marketing, and sales work as hard to attract new users as they do to retain and grow the existing ones. 

Customer support is also quite a powerful activity since the company maintains a learning center. Some integrations require the developer’s work on the client side. To smooth out the process, Slack must provide articles and video tutorials to minimize the learning curve and prevent any errors.

Key Partners

To ensure user convenience, Slack partners even with competitors such as Microsoft Teams, not directly though. In fact, Slack partners with Microsoft to integrate tools included in Microsoft 365 and Office 365 plans. Tools include Outlook Calendar, Outlook Mail, and One Drive. 

Markedly, one of the most valuable partners is Google Workspace. Calendar, Gmail, and Google Drive are the most powerful integrations Slack offers. 

It is essential to highlight the community around Slack. The Slack App Directory allows independent developers to publish their apps. They can be any apps for automation, increased productivity, CRM, project management tools, and such. They all undergo a manual review by Slack’s App Directory team. Slack increases its library of reliable and valuable tools while developers get exposure to millions of Slack users. 

Last but not least, large-scale enterprises that adopt Slack have partner-like relationships. They require customization and deep levels of integration. Therefore, Slack teams cooperate with them to tailor the app to their needs and resolve any issues that might arise. 

Slack Revenue Model: Revenue Streams & Cost Structure

In terms of revenues, there are two main sources: premium subscriptions (pro and business+) and custom pricing for large enterprises (enterprise grid). The pro plan is 8.75$ per user per month and business+ is 15$ per user per month. This pricing represents an increase in price that happened in 2022. 

In terms of cost structure, Slack has the following expense categories:

• Technology Infrastructure Maintenance
• Salaries
• Marketing & Sales
• Legal and Administrative

Other Companies Following the Freemium Business Model

Maintaining a large free user base with a percentage of those converting to paid users might seem challenging. Yet, there is a list of successful companies doing that. They are Evernote, Asana, Google Drive, Zoom, Canva, Grammarly, Spotify and Duolingo. Each of these companies is well-known servicing millions of users for free and having attractive premium plans.

FAQ: Slack business model and revenue model