The Slack Business Model – How Does Slack Make Money?

Executive Summary:

Slack is a messaging application that allows users to collaborate via chat, phone, or video. Users can organize groups in so-called channels to work on projects or exchange information about certain topics.

The business model of Slack is centered around charging customers a monthly subscription.

Founded by experienced entrepreneurs in 2013, the company became an immediate success with users. Salesforce ultimately acquired Slack for $27.7 billion in December 2020.

How Slack Works

Slack (short for Searchable Log of All Communication and Knowledge) is a SaaS messaging app that allows users to communicate with each other individually or in groups (so-called channels).

slack screenshot

Slack is available on both desktop as well as mobile (via Android and iOS) devices. The tool is primarily aimed at businesses and helps to facilitate and organize conversations across all teams and departments.

Channels can be used for teams, projects, office locations, or anything else that is relevant to a company.

Furthermore, users can share files with each other. Meanwhile, all (team) interactions are stored and searchable within the Slack app. And should you be tired of chatting, then Slack allows you to voice-call other users in your network.

Lastly, Slack lets you connect with your favorite third-party tools. Example applications include Zoom, HubSpot, or Trello.

A (Not So) Short History Of Slack

Slack was founded and launched in 2013 by Stewart Butterfield (CEO), Eric Costello, Cal Henderson, and Serguei Mourachov.

To understand the company’s rise to prominence, it is worth taking a look at the life history of its main spokesperson – CEO Stewart Butterfield.

His father David Butterfield moved to Canada in the 1970s after fleeing the North Carolina army base that prepared him to fight alongside other Americans in Vietnam. He met his future wife Norma and the pair joined a hippie commune in the fishing village of Lund, British Columbia.

Norma gave birth to Stewart in 1973, naming him Dharma, a Hindu term that can be translated to “virtue”. When Stewart was five, the family moved to Victoria, where his father started a successful construction business later on.

Meanwhile, Stewart began messing around with computers and taught himself how to code. At the age of 12, he changed his name from Dharma to Stewart.

But instead of pursuing Computer Science route, Butterfield went on to study philosophy at the University of Victoria as well as Cambridge University, where he completed his master’s degree in 1998.

At the turn of the millennium, when the thirst for tech startups was at its all-time high, Butterfield moved back to Canada to start a gaming company. Game Neverending was, as the name indicates, a multiplayer fantasy game where users created characters that explored an infinite world (similar to Minecraft).

One of the game’s biggest fans was a young London-based programmer named Cal Henderson. In fact, he was such a big fan that he moved to Vancouver to work on the game together with Butterfield and his then-wife Catarina Fake.

By 2004, it became evident that the game was failing. Luckily, the team had developed a tool that allowed users to upload and share images. The day before a big tech conference in San Diego, they scrambled together a quick prototype and presentation of the tool.

That demo ended up becoming, one of the world’s first platforms that allowed people to share photos with each other. And because of the platform’s focus on open-source development, users were able to alter Flickr to their liking.

flickr original website
Wayback Machine

Flickr became an instant sensation with users all over the world, attracting millions of photo enthusiasts every month

. A year later, Butterfield and company sold Flickr for a reported $25 million to Yahoo. At that time, funding for tech startups pretty much dried up, which forced the team to sell the service to keep it afloat.

As part of the deal, Butterfield agreed to work at Yahoo and lead all development efforts regarding Flickr.

But, as with any big corporation, he soon saw himself fighting for precious development and funding resources. Furthermore, many teams at Yahoo wanted to use Flickr’s photos for their own product development, which ultimately slowed down the progress of Flickr as well.

So, in 2008, Butterfield (as well as Fake and Henderson) packed his bags and left Yahoo – with the goal of working on another game. This time, the company was named Tiny Speck whose stated goal was to develop a game called Glitch.

Glitch, as the company wrote on its website, took place “in the far-distant and totally-perfect future, the world starts becoming less and less probable, things fall apart, the center cannot hold, and there occurs what comes to be called the “glitch” — a grave danger of disemprobablization.”

The company received a seed round of $1.5 million and was backed by the likes of Accel and Andreessen Horowitz. Butterfield knew Bradley Horowitz from his time at Yahoo where he served as an executive responsible for company acquisitions.

Tiny Speck raised two additional rounds in April 2010 and 2011, respectively, bringing its funding to over $17 million. Furthermore, the team finally released Glitch into beta testing, making it available to the wider public two years after they started working on the game.

After numerous attempts of launching the product and pulling back, Glitch had to shut down in November 2012. The company cited the inability to attract a big enough audience as the reason for closing down.

Luckily, the story does not end here – again. The company still had some cash reserves available from its previous funding rounds. And more importantly, they had something of much greater value.

Since the staff working at Tiny Speck was geographically dispersed, its engineers had developed an in-house tool that allowed them to communicate with each other. It became so ingrained in the team’s daily practices that Butterfield decided it could be worth trying to sell it to other startups.

In May 2013, Tiny Speck began testing what would later become Slack with a total of 45 startup companies. Three months later, in August, Slack finally opened to the wider public.

Within 24 hours of the launch, over 8,000 companies signed up to use Slack. Tiny Speck officially rebranded to Slack Technologies in August 2014.

slack growth

A year later, over 140,000 people used Slack on a daily basis. That number rose to 2.7 million within two years of operation. Furthermore, the average user spent over 10 hours a day using the Slack app.

With numbers like that, it came as no surprise that Slack became the fastest unicorn in startup history (at least at the time). Just eight months after the official launch, the company’s valuation rose to a staggering $1.12 billion.

Part of the reason why Slack grew at this unprecedented space was simply word of mouth. Existing users began recommending the tool to their friends and family, speeding up adoption at a rapid pace.

Another reason for its stellar growth was how easy and intuitive it was to sign up and use the tool. While many other competing chat applications had to be integrated into a company’s IT infrastructure, using Slack was just a few clicks and a download away.

Over the coming years, Slack continued to add new features (e.g. its infamous Slack bot or GIFs’s) as well as users to its platform. The continuous growth resulted in the company going public in June 2019.

While Slack’s growth continued to accelerate in the quarters thereafter, the company ultimately fell short of investor expectations. In Q1 of 2020, its business ‘only’ grew by 50 percent year-over-year (compared to Zoom’s 169 percent growth in the same period).

One of the reasons Slack ended up missing expectations became its biggest competitor Microsoft (and its communication platform Teams). In July 2020, Slack even filed a complaint against the Seattle-based tech giant with the European Commission, stating Microsoft would engage in anticompetitive behavior.

In the end, Butterfield and his team had to admit that competing against the big guys would continue to be an uphill battle. Its founders eventually decided to give in and be open to acquisition talks.

These conversations finally came to fruition in December 2020 when Salesforce announced it would acquire 100 percent of Slack for a whopping $27.7 billion. The deal would solidify Salesforce’s status as the clear number 2 in the enterprise software world – trailing behind its arch rival Microsoft.

How Does Slack Make Money?

Slack makes money by offering 3 different premium subscriptions aimed at small-, medium-, as well as enterprise-sized businesses.

The company utilizes a freemium model to attract users. This means that everyone interested can try out Slack and its applications for free – as long as they please.

Free users are restricted from accessing parts of Slack’s ecosystem as well as limited on the number of messages and files they can share.

Going the freemium route is a fairly common monetization and growth strategy for software-based companies. Notable examples include firms such as Grammarly or Trello.

Experts in the industry refer to this strategy as bottom-up sales. In essence, the buying decision is often made without ever talking to a sales rep.

Instead, the users themselves become advocates for the product simply by becoming engrained in the free tier or paying for the premium subscription out of their own pocket.

As a result, Slack is able to save considerable sums of money that would otherwise go towards employing a large sales organization and paying generous bonuses.

And even if you need to pitch the product to a potential customer, it is oftentimes easier because the people you’re pitching to are already familiar with the product.

To access some of the more advanced features, users will have to opt into one of the three premium subscription plans Slack offers. These include Standard, Plus, and Enterprise Grid.

slack pricing

Plans are charged on a monthly and user basis. For instance, the Standard plan costs $7.25 per month per user onboarded.

Some of the premium features include no limits on conversation history, group voice and video calls, advanced identity management, a dedicated customer support team and many more.

Slack customers include the likes of Shopify, Airbnb, Lyft, Oracle, Electronic Arts, and many others. More specifically, Slack now counts a total of 160,000 paying customers.

One of the key advantages of offering your products to other businesses is that the product is extremely sticky.

Once the organization is entangled with the product, it becomes substantially harder to replace – especially as the firm continues to grow. And since Slack iss used extensively among startups, these companies are by nature expected to grow.

As a result, Slack’s churn rate (= the rate of customers stopping to pay) is extremely low. This significantly improves the firm’s ability to forecast revenue.

Moreover, the above-mentioned subscriptions fees are charged on a yearly-basis. If you were to pay per month, then the Pro plan would actually cost $8.25 per month.

Therefore, Slack can already utilize the revenue it generates from the yearly plans and spend it for R&D and other types of purposes (again feeding into the plannability aspect).

Slack Funding, Valuation & Revenue

According to Crunchbase, Slack has raised a total of $1.4 billion in 12 rounds of venture capital funding.

Investors into the company include Accel, Andreessen Horowitz, Social Capital, Google Ventures, Kleiner Perkins, General Atlantic, and many others.

Slack is currently valued at $27.7 billion – at least to Salesforce. Whether Salesforce decides for Slack to remain a public company remains to be seen.

In 2021, Slack generated $902 million in annual revenue, up from the $630 million it made the year prior.

Hi folks, Viktor checking in! Years of experience in various tech-related roles have led me to start this blog, which I hope provides you with as much enjoyment to read as I have writing the content.