Kiwi Startup Xero Pries Accountants Away from Intuit’s QuickBooks

6/30/14Follow @wroush

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mundane and annoying task, but Sutherland says Xero’s interface makes it feel like a game. “The transaction is on the right and what you expect at the bank is on the left and it’s just a game of matching,” he says. “It’s sort of like Tetris. We’ve heard people saying they’re upset when they’re done that they have nothing left to reconcile.”

The consumer-like features extend into Xero’s mobile app, which lets users enter expenses into the system by snapping a photo of a receipt. Because the system is cloud-based and accessed from a Web browser, there’s no on-premise software to download or maintain—another feature that cements Xero’s resemblance to Mint, Check, and other popular consumer money management apps.

Intuit offers a cloud-based version of QuickBooks, but its architecture dates back to the desktop days, and it’s been known to suffer downtime, including a four-day outage in 2011 that paralyzed many small businesses. “I think there are systemic issues in the core of that product, largely because it was built in the early days, before mobile took off,” Sutherland says. “They basically ported their desktop product and put it online and didn’t rethink how it actually works.” Xero was born in the cloud, which means the startup has a more natural understanding of how information flows between accountants and small business owners, especially those who are on the go, Sutherland says. [Update 6/30/14: Steve Sharp, Intuit's communications manager for small business, contacted Xconomy to dispute Sutherland's characterization of QuickBooks Online. Sharp says the company "launched an entirely new, rebuilt from the ground up and made-in-the-cloud version of QuickBooks Online last September."]

But as fun as Xero is for business owners, it’s accountants who choose what software to use to keep a company’s books—which is why they’re the main focus of Xero’s sales strategy.

Under Xero’s business model, the basic cloud software is free to accountants, as is some extra client-management software for running an accounting practice. It’s only when an accountant brings a new client onto the system that’s Xero starts charging a subscription fee. (Prices range from $9 per month to $180 per month, depending on the number of employees a company has and the amount of file storage it needs.) The more customers an accountant brings to Xero, the larger the discount the startup offers to her clients. It’s a clever model, since winning just one accountant can meaning winning all of his or her clients.

Karpas acknowledges that there are hundreds of thousands of accountants who have been using QuickBooks for years and aren’t about to defect to Xero or Freshbooks. But he thinks there’s plenty of room for Xero to compete in two other segments: new businesses that aren’t using any accounting software yet, or are only using Excel spreadsheets, and businesses served by accountants who are dissatisfied with QuickBooks, or who see it as the choice of an older generation of accounting professionals.

“The accounting practice that is run by the person who is in their 60s and is thinking about retirement and has used QuickBooks for 20 years—they are not going to switch,” Karpas says. “But the younger, more aggressive accountants, meaning people in their 20s, 30s, and 40s, who are looking to grow their practices, are very open to talking to us and are looking for an alternative to QuickBooks, which has acted like a monopoly.”

The classic “disruptive” startup, as defined by Harvard Business School scholar Clay Christensen, starts out by offering a product that’s inferior to the incumbent, but is so much cheaper it draws users away. That’s not the scenario with Xero, which is actually more expensive and more feature-rich than QuickBooks Online. Rather, Xero’s strategy has been to frame itself as the modern, mobile-friendly, consumerized alternative to a stodgy 1990s brand.

All it needs now is more name recognition. “Our biggest issue now in the U.S. is that we are not famous enough,” Karpas says. “We are the first legitimate competitor to QuickBooks in at least a decade, and you could argue even longer. We have invested over $200 million over eight years in building this product, and we have traction around the world. What all that means is, if people hear about us, they can know that we are going to be around. And then we will win more than our fair share of bakeoffs.”

Becoming famous is a different problem in the U.S. than in other markets, mainly because there are so many small businesses here: 23 million, according to the Small Business Administration. So Xero’s big challenge in North America is to decide which sectors to go after, and tailor its software and sales pitch accordingly. Xero has a plan, according to Karpas, but he demurs about the details—he says that’s the startup’s “secret sauce.” If he and Sutherland can get more American accountants to take a look at a little-known service from a Southern Hemisphere country with a population smaller than Houston’s, they may yet become a bigger worry for Intuit.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • Rich

    “They basically ported their desktop product and put it online and didn’t rethink how it actually works.”

    Drury and his crew have been spreading this exact line which is not true for years. (“it’s not a lie if you believe it Jerry”) They’re MO is to make up a story and hammer it to make it true.

    Xero is a decent product but it’s no where as deep as QBO which is a well thought out intuitive product with millions of customers. Xero seems pretty elegant and easy to use. A lot of thought has gone into UX… however it lacks quite a bit. They’ll catch up in a couple of years though.

  • US Accountant

    “Luring customers away from QuickBooks?” This is all about the US/Canadian market, where Xero has 18,000 companies (as of 3/31, from their investor presentations). There are literally millions of companies on QB desktop in US/Canada, and hundreds of thousands in the US on QB Online. Bottom line, 90% of small business accounting in the US is installed on a PC, while only 10% is online. There’s no mention of FreshBooks, Wave Accounting, or Kashoo, even though all three of these products likely have more US/Canadian customers than Xero.

    Fact check yourself on the “luring customers away from QuickBooks” – more companies adopt QB Online than Xero in the US by a wide margin, and the same could be said for FreshBooks, Wave Accounting, and Kashoo. With QuickBooks desktop/online having a 90% market share in the US, a natural percentage of switchers will come from there.

    There is a coming war among SaaS accounting products, but it’s a long way from settled, and while Xero is on the leaderboard in Aus/NZ, they struggle to be in the top 5 in the US. While Xero has had a positive effect on the pace of innovation in the industry, they are a long way from being in second place, and even farther from being the market leader.

  • Patti Scharf

    Good article although I’m not sure Freshbooks has ever been a real competitor to QuickBooks. Xero, on the other hand, will soon be giving them a run for their money.

    A week or two ago, I wrote a blog on a similar topic (http://www.catchingclouds.net/beyond-the-clouds/feeling-forced-into-the-new-quickbooks-online-why-i-prefer-xero), and I agree that once the US finds out about Xero, QuickBooks will have their first real challenge in more than a decade.

  • http://www.rapidentry.com.au RapidEntry

    Great work on this artilce Wade, as an Australian, it resonated with me as you’ve told the story very well. Xero hasnt ever had a desktop product.Rich. Xero isnt as deep as QBO thats true but thats because it didnt come to market fully developed. It is totally functional in its current setup but it is ever growing and developing in different ways. This is having an amazingly positive impact on its users who, whilst beng a little frustrated, are loving the parts of the product that Xero does well and the uncomplicated nature of the product overall.