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Zoom Revenue Model

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Agenda

Introduction

Storyline

Assumptions

Objectives

Simulation

Outputs

Takeaways

References

Conclusion

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INTRODUCTION

All you need to know about Zoom and it’s current revenue strategies!

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  • Zoom - the frictionless communications platform with video as its foundation
  • Founded in 2011, Zoom is publicly traded (NASDAQ:ZM) and headquartered in San Jose, California
  • Rise in the usage during pandemic, experienced a remarkable increase in revenue in 2021, surpassing 300%
  • Two key revenue streams:
    • Free model - free to use with ads.
    • Premium model - monthly subscription fee with no ads.

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STORYLINE

Zoom introduced ads to generate revenue, is this a good decision? What’s next?

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Strategy 1: Ads for Free users

Strategy 2: No Ads for Premium users

Our story is to unveil whether Zoom made the right decision of introducing ads to free users or whether it should have only focused on generating revenue from its premium users.

Higher Revenue

User Satisfaction

The Trade-off Challenge

Which Strategy generates higher Revenue?

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ASSUMPTIONS

Let’s find out which strategy would help Zoom generate higher revenue in the upcoming 10 years while maintaining user satisfaction!

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Strategy 1 - Free + Ads

  • Companies to pay Zoom - CPC of 1$
  • Companies to pay Zoom - CTR of 5%
  • Number of Ads shown = 450 every month
  • Number of unsatisfied users after viewing ads - 25%
  • Probability of unsatisfied free users sticking to free model - 20%

Strategy 2 - Premium users

Strategy 1 - Free + Ads

  • Companies to pay Zoom - CPC of 1$
  • Companies to pay Zoom - CTR of 5%
  • Number of Ads shown = 450 every month
  • Number of unsatisfied users after viewing ads - 25%
  • Probability of unsatisfied free users sticking to free model - 20%

Scenario 1

Scenario 2

The total number of users for Zoom in both strategies follows a Normal distribution.

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OBJECTIVES

We have two key objectives for this presentation.

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Between Strategy 1 and Strategy 2, we want to identify which strategy leads to higher revenue generation for Zoom.

Two Main Objectives

If limiting the number of ads can improve the user satisfaction rate, how many ads should be shown for each month in order to achieve the highest satisfaction rate for the free users?

1.

1I.

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SIMULATION

Let’s simulate the total revenues for both the strategy and pick the best strategy based on statistics!

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Simulation Inputs

Table 1: Simulation Inputs for the Revenue Model Problem

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Scenario for Strategy 1

Formulas Used:

  • Total Users = INT(NORM.INV(RAND(),100000,20000))
  • Revenue for Satisfied Users = G3*0.75*ads*CPC*CTR
  • Revenue for Unsatisfied Users who continued = G3*0.25*0.20*ads*CPC*CTR
  • Total Revenue from Strategy 1 = Add the revenue columns H and I

Strategy 1 = Free Users + Ads

Table 2: Simulation for 1 run to determine total revenue from Strategy 1

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Scenario for Strategy 2

Formulas Used:

  • Total Users = INT(NORM.INV(RAND(), 50000, 10000))
  • Revenue for Satisfied Users = J3 * premium_fee
  • Revenue for Unsatisfied Users who converted = G3 * 0.25 * 0.80 * premium_fee
  • Total Revenue from Strategy 2 = Add the revenue columns K and L

Strategy 2 = Premium Users + No Ads

Table 3: Simulation for 1 run to determine total revenue from Strategy 2

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OUTPUTS & ANALYSIS

What does our outputs from the simulation tell us?

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Simulation Outputs

Table 4: Simulation Outputs for both Strategy 1 and Strategy 2

Figure 1: Comparison of total revenue generated for Strategy 1 and Strategy 2

For N = 1 run

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Simulation Outputs

For N = 1000 runs

Figure 2: Comparison of total revenue generated for Strategy 1 and Strategy 2 for N = 1000.

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Simulation Outputs

For Objective 2, we determine the optimum number of ads to ensure both free user satisfaction and Strategy 1 generates higher revenue than Strategy 2.

Optimum number of ads to be shown to free users for Strategy 1 = 170 ads per month

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KEY TAKEAWAYS

What can we infer from the analysis?

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  • Findings show that Strategy 1 (free users) generated higher revenue for Zoom compared to strategy 2 (premium users).
  • Strategy 1 has higher variability also compared to Strategy 2, which is mainly because of the dissatisfaction of free users towards using Zoom with ads.
  • Although Zoom generates higher revenue from Strategy 1, more free users due to dissatisfaction from viewing too many ads are converting to being premium users. This could potentially harm Zoom in the long run given it generates higher revenue from Strategy 1. So Zoom needs to solve this tradeoff issue.
  • Since 80% of the free unsatisfied users convert to premium users, Zoom needs to find a way to lower the number of ads shown to the free users in order to improve satisfaction, decrease the conversion rate, and reduce variability across Strategy 1.
  • Findings show that Zoom needs to lower ads and show 170 ads to the free users to reduce their dissatisfaction and still generate higher revenue compared to the premium model strategy (Strategy 2).

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References

  1. https://support.zoom.us/hc/en-us/articles/4412248016013-Zoom-Advertising-FAQ-
  2. https://zoom.us/pricing
  3. https://www.businessofapps.com/data/zoom-statistics/
  4. Li, B., & Kumar, S. (2022). Managing Software-as-a-Service: Pricing and operations. Production and operations management, 31(6), 2588-2608.

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THANK YOU FOR LISTENING!

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