Xero has raised its prices in Australia for the second time in 12 months by an average of 13 percent across almost all its plans.
Amid the price rises, which are effective 1 July, Xero has renamed and repackaged its three cheapest and most popular plans. In every case the new plan is more expensive and has fewer features than its predecessor.
Xero also announced it would retire the Premium range of plans and replace them with the more expensive Ultimate plan family. However, Xero has improved the value of the Xero Ultimate plans by doubling the number of included licences for add-on features such as Xero Expenses and Xero Projects.
The likely outcome for the majority of Xero’s Australian customers is that they will pay 10 percent or more for the same software, and in some cases as much as double. Businesses on the Ultimate plans with more than five staff could save up to $60 a month.
The software company renamed and repriced its three low-end plans as Ignite (formerly Starter, up $3 from $32 to $35 a month), Grow (formerly Standard, up $5 from $65 to $70 a month), and Comprehensive (formerly Premium 5, up $5 from $85 to $90 a month).
Xero made the biggest price increases in the other Premium tier plans, which will be merged into the equivalent (and more feature-rich) Ultimate plans.
The Premium 10 jumped $16 and Premium 50 leapt $20 a month at the new Ultimate 10 and Ultimate 50 prices (both up 16 percent). The Premium 100 rose $30 and the Premium 200 sprang by $40 a month to the Ultimate 100 and Ultimate 200 prices (up 18 percent and 20 percent respectively).
The Ultimate 50, 100 and 200 plans jumped by $10 (7 percent), $20 (11 percent) and $30 a month (14 percent) respectively.
Businesses on the to-be-retired Premium plans will be moved to the Ultimate plans on 1 July. Businesses on the two cheapest plans (Starter and Standard) can remain on them, at least in the short term. Xero said it would move customers to new plans in phases, and aimed to complete the migration to new plans by March 2025.
How Xero Ignite compares to Xero Starter
The $35 a month Ignite plan has the same limits (20 invoices and 5 bills per month) as the $32 a month Starter plan, however it loses the one-person payroll included with Starter. Individuals running their own companies will need to pay $70 a month (up $38) for the Grow plan to use payroll. Or potentially they could use the Ignite plan with Xero’s $20 payroll product, up $23 a month. (Ed: Xero’s documentation doesn’t state whether this is possible.)
The Starter plan also gave users optional access to add-on features but this access has been dropped from the Ignite plan.
- Claiming expenses and tracking mileage with Xero Expenses (previously an optional $5 a month per person on Starter) is now only available on Grow ($70 a month), which includes a Xero Expenses licence for one person
- Extending cashflow analytics from 30 days to 90 days with Analytics Plus (previously an optional $10 a month) is now only available on Comprehensive ($90 a month)
- Tracking projects with Xero Projects (previously an optional $7 to $10 a month per user) is now only available on Ultimate 10 ($115 a month), which includes a Xero Projects licence for 10 people
Observation: The Starter plan’s 9 percent price increase is not the most important factor in its rebadging as the Ignite plan. Stripping access to project management in particular will force a lot of small businesses to move up to a $115/month plan. If they were a three-person micro-business, that’s double the price they previously paid for their accounting and project management software.
Likewise, dropping the single-person payroll that businesses used in Starter will force them to move to Grow, again more than double the price they paid previously. Professionals operating through companies rather than as sole traders will be most affected.
How Xero Grow compares to Xero Standard
The $70 a month Grow plan is almost identical to the $65 a month Standard plan, except that the inclusion of two-person payroll has been cut to just one in the Grow plan. However, Grow does include one licence to Xero Expenses, which would have cost $5 a month extra under the Standard plan.
Unfortunately, the Grow plan also drops access to Analytics Plus and Xero Projects, which were available on the Standard plan for $10 a month each.
As per above:
- Extending cashflow analytics from 30 days to 90 days with with Analytics Plus (previously an optional $10 a month) is now only available on Comprehensive ($90 a month)
- Tracking projects with Xero Projects (previously an optional $7 to $10 a month per user) is now only available on Ultimate 10 ($115 a month), which includes a Xero Projects licence for 10 people
Observation: Paying $70 a month for an otherwise fully featured Xero plan but not having the option to add project management or expense management seems unfair. Especially as Xero isn’t grandfathering businesses already on the Standard plan that are already using those add-on features. They will need to pay another $20 a month to keep using Xero Expenses or $35 a month for Xero Projects on the Comprehensive and Ultimate 10 plans, respectively.
How Xero Comprehensive compares with Xero Premium 5
The $90 a month Comprehensive plan is almost identical to the $85 a month Premium 5 plan, even maintaining the same number (five) of employees on payroll. Xero Comprehensive is actually better value because it includes licences for five users on Xero Expenses, which would have cost another $25 a month (or $5 a month per person) on the Premium 5 plan. Comprehensive also includes the 90 day cashflow forecast under Xero Analytics Plus, which is a nice bonus. However, businesses that were using Xero Projects will now have to upgrade to Ultimate 10 at $115 a month.
Observation: Businesses on the Premium 5 plan have the best outcome from this price rise. For only $5 a month more they will get expense management for up to five users, plus 90 day cashflow analysis.
How the updated Xero Ultimate plan compares to Xero Premium
The retirement of the Xero Premium plans means businesses will pay $16 to $40 a month more for the equivalent Ultimate plans. The Ultimate plans at least sweetened the deal by including five user licences for Xero Expenses and Xero Projects, representing an additional $25 and $35 a month in extra value, respectively. However, businesses would likely have already moved to Xero Ultimate plans to take advantage of these inclusions.
The good news for businesses already on the Xero Ultimate plans is that from 1 July they will have double the number of licences included for Xero Expenses and Xero Projects (from five to 10 people). A business with 10 staff could save up to $60 a month from add-on licence fees compared to the outgoing Xero Ultimate plan.
Observation: Xero did have too many plans which was confusing. It is much simpler to have one plan family at the upper end. However, businesses that were happy on the Premium plans won’t be impressed that they have to move to more expensive Ultimate plans.
For businesses that are on competing expense management and project management products, moving to Xero Ultimate could also be an attractive option to reduce their total software spend. Especially for 10-person businesses; paying $115 a month for accounting software, payroll, expense management and project management is reasonable value (noting that only five users are included for expense and project management).
Why does Xero keep increasing prices?
Obviously, no-one likes a price rise, neither accountants nor businesses. It's particularly toughfor firms that include the cost of Xero as part of their service and have to tell their clients every year why their fees are going up yet again.
Yet Xero has increased prices almost every year since 2018 (it delayed a price increase in 2020 due to the COVID pandemic). As the graph above shows, the size of the price increases has also risen.
There are three reasons driving these price increases.
The Rule of 40
These price increases are most likely related to Xero’s commitment to meeting a financial metric called the Rule of 40. In Xero’s investor day presentation last year, CEO Sukhinder Singh Cassidy revealed that Xero’s aspiration as a company was to "double the size of our business and deliver Rule of 40 or greater performance”.
The Rule of 40 benchmark is used primarily by software-as-a-service (SaaS) companies to evaluate their performance and is especially popular among venture capitalists and investors. It states that a company's combined growth rate and profit margin should be at least 40 percent.
A total of 40 percent or more is considered a sign that the company is well-balanced between growth and profitability, making it an attractive investment or a healthy business.
Xero is tantalisingly close. In FY23, Xero’s revenue growth was 28 percent and its free cash flow margin was 7 percent, falling 5 percent short of investors’ favourite number.
Increasing prices across almost all plans, and restructuring plans to force businesses to upgrade to more expensive versions, is a simple way to increase profit margins.
Inelastic demand
“Price inelasticity” is financial-speak for the ability to raise prices without losing customers. This means that even if the price increases, the quantity demanded by consumers does not decrease significantly.
In short, Xero is raising prices because it can.
From the beginning, Xero executives have told investors that accounting software was “sticky”. It tends to have inelastic demand due to several factors:
- High switching costs: Once you have set up your accounting software it’s a hassle to switch to another platform. There’s the cost of transferring data, retraining employees, and potential downtime or errors during the transition.
- Integration and compatibility: Accounting software often integrates deeply with other business systems (like payroll, inventory management, etc.). In Australia, Xero has the largest number of integrations by a country mile. It has also invested in a very deep integration with Stripe, a critical component for many ecommerce businesses. This makes it hard to replace.
- Partner network: Accountants and bookkeepers can have a major influence on the type of accounting software their clients use. Xero’s clever strategy of giving away practice management software helped it create a large network of firms that are most efficient when they’re using Xero (blue) with Xero Tax and Xero Practice Manager. There are in fact quite a number of alternatives to Xero, even within Australia. But firms will need to amend their workflows and may complete jobs in more time (at least initially) when using other software.
A big increase in R&D
This is a little more speculative, but Xero will need to spend a lot of money to keep up with its primary competitor, Intuit. The obvious domain is in generative AI. Intuit has spent much more time and money on developing generative AI as an interface and agent for accounting software as well as for its other portfolio products (MailChimp, CreditKarma, TurboTax).
It is also using generative AI to improve the efficiency of its software development and to support its customer support and bookkeeping service staff.
While Intuit’s bet on the technology is still unproven – its AI assistant Intuit Assist hasn’t made it out of closed beta yet – Xero last month released a promotional video imagining what its own assistant would look like.
Nevermind that Xero’s video came out almost 12 months after Intuit’s. The challenge for Xero is that it doesn’t have anywhere near the number of data scientists as Intuit, people who are expensive to hire and hard to find.
Xero is also dealing with significant technical debt. It’s hard to believe, but it’s been almost 20 years since the core code of Xero was first written. It was built to be hosted on Rackspace servers rather than the industry hosting standard for SaaS, AWS.
This old codebase makes it harder to add improvements. Witness the time and effort it has taken to create a single contact record for Xero Practice Manager, Xero Tax and Xero HQ. This is not feature development, it’s housekeeping. But it’s a necessary step if Xero wants to get the most out of AI.
AI works best when data is clean and neatly ordered. Like any large software company, Xero runs a collection of databases for its products, some of which were built in-house and others acquired. Centralising the data from all those databases is a big, expensive job.
Expanding the payroll to compete with Intuit on AI and hiring software developers to rewrite the codebase is going to be hard to do without jeopardising the Rule of 40 goal. Raising prices will make this easier.
Conclusion
Xero will struggle to raise prices in more competitive markets such as the US and UK, where there are much fiercer fights for market share.
But Xero faces little competition in Australia. There are many competitors here but none that have the extensive list of integrations, the breadth of the partner network and the depth of features.
Some competitors do well in one or two of these areas but not in all three. This, however, is changing. There are a number of smaller alternatives for businesses currently on Starter/Ignite and Standard/Growth plans. There are also interesting players emerging from the US which have more modern software that is built to work with AI models.
If you’re interested in alternatives, you can watch our independent research on Agents of Change (a free introduction is here, or you can watch the full workshop for $99 here).
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