Notion: The Zero-in-One Business Model
By: Adam Fancy & Joey Gendy
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Like many startups, Notion was founded in San Francisco, California in 2012. Unlike many startups, Notion was valued at over $10B in 20211, approximately 300 times its annual revenue—an astronomical valuation in spite of 2021’s huge increases across the technology sector. Despite being met with such investor optimism, Notion’s ability to acquire new customers is stalling. This has caused the company’s revenue growth rate to shrink 40 percent in 2021. Industry-wide trends are also making it more difficult to access financing, with capital raises for the startup space falling significantly in the same period.
Notion was founded by Ivan Zhao and Simon Last to simplify file management, scheduling tasks, and productivity. The idea nearly failed in 2015 as they struggled with application stability and liquidity issues, leading Zhao and Last to fire their team of four and start over. In 2018, Notion began gaining traction and received a positive review in the Wall Street Journal, leading to venture capital interest. This led to a $10 million Series A fundraise at an $800 million valuation in 2019. A year later, the company became a Unicorn.
Notion seeks to serve as an “all-in-one workspace” for users that spans task, knowledge, and document management. Its ease of use and high degree of customizability have created a cult-like community: Notion’s Twitter and Reddit pages respectively boast 320,000 and 240,000 Notioners who share templates, dashboards, and best practices.
The Potion of Notion
Taking Note of its Users
Notion’s users span from individual note-takers to small and medium enterprises managing complex projects. Students are an important demographic of the individual user segment as they use Notion to keep their personal tasks, course notes, and club responsibilities organized.
An elusive aspect of Notion’s business model is that ‘individual users’ are barely monetized. A few years ago, Notion made the individual plan free for everyone, leaving the premium personal pro plan as the only source of revenue from individual users. The personal pro plan differs from the individual plan in a few aspects: users are granted unlimited file uploads, version history, and access for over five guest users. These unique features on the personal pro plan are a perfect match for students’ needs, yet Notion makes this premium plan free for all university students.
‘Enterprise users’ are Notion’s main monetization strategy as they constitute and of the 30 million users Notion serves today, only four million are paying enterprise users.
A Saas-y Software Model
Freemium SaaS businesses offer their software for free and then charge users for additional features and/or removal of advertisements. This model is used to attract a large user base5 and is used by many tech companies (ex. Spotify, Dropbox, Wix). However, many companies with this model burn through cash reserves quickly and require continuous injections while attempting to convert users from free to paid subscriptions.
Notion operates the freemium model as part of its unique ‘land and expand’ growth strategy, boldly betting that offering the premium product for free to individual users will convert them to enterprise users later on.
To Land and Expand
Missing Money in the Mass Market
The land and expand strategy is wholly reliant on converting individuals into enterprise users to drive revenue, with Notion unable to walk back on its promise of keeping its core set of features free to individual users forever. With organic growth slowing and 86.7 percent of all users currently unmonetized, even a dollar spent by the 26 million freemium users could double Notion’s annual revenue.
A Heavy Wait on the Scale
In comparison to the advanced ticketing, permission management, and reporting features found in large-scale project management software like Atlassian’s Jira, Notion offers a simplified and streamlined experience that grows with the needs of users. However, Notion’s minimalist approach is both a blessing and a curse; for example, as governance requirements balloon with headcount, enterprises will be held back by its limited user interface and incompatibility with more complex workflows.
The Enter-Price is Right
The competitive landscape does not paint such an optimistic picture of Notion’s potential future growth and profitability. Large players in the team management software industry—Atlassian and Asana, for example—and newer competitors like ClickUp are flooding the market and implementing this “all-in-one workspace” trend.
Notion lacks a software ecosystem like Microsoft and Google. Although Notion offers many features to its users, there are no supporting products to help integrate with its current productivity software structure. In November 2021, Microsoft announced its new product Loop. Loop is Microsoft's response, and direct competitor, to Notion. It has a very similar design to Notion, and its features are almost identical. Loop will have a major advantage over Notion because of its integration with the Microsoft ecosystem—email, calendar, and documents would fit seamlessly into Loop through Microsoft’s Outlook and Office Suite applications. Additionally, Microsoft's current user base of 1.2 billion users worldwide is nearly 40 times that of Notion.
Putting a Plan in Notion
Ultimately, Notion’s issue lies in slowing revenue growth. This stems from the company’s inability to create cash flows from the largest segment of its user base, which is unpaying, non-enterprise users. Notion would risk losing its existing customers if it eschewed freemium user functionality for short-term profits. Without having to compromise on the ‘land and expand’ conversion funnel of its business model, Notion should create an add-on marketplace to sell third-party improvements to the core application. The marketplace would be geared towards all users—especially students—and broadly improve the entire collaborative suite to better scale with the demands of growing organizations. The walled garden market of competitor Atlassian, for example, brings in over $400 million of annual revenue in transaction fees alone.
Through an internal bidding process, developers could propose and develop novel features that would be provided at no cost for personal pro subscribers and enterprise plans. Conversely, freemium users could be charged per add-on selected. The concept is similar to limited open sourcing, whereby external entrepreneurs are called upon to enhance the product for general users. A profit-sharing model linked to the popularity of each add-on would be put in place to compensate developers for producing a useful novel feature.
Add-ons could help Notion compete with the user experience of established collaboration software such as Atlassian’s Jira/Confluence suite, GSuite, and Microsoft Office. For example, the implementation of live cursors would improve real-time document collaboration. Add-ons could also help the platform envelop other aspects of productivity software through file-sharing. For example, a ‘Community Notes’ feature allowing students to publish and download notes within public and private Notion communities would improve the software’s functional coverage. Each additional user to this ecosystem would incrementality benefit the platform’s web of information and solidify Notion’s position in the market.
Notion’s strong product offering and user acquisition strategy have enabled its high valuation and strong subscriber base. By capitalizing on its characteristic customizability and accessibility, Notion can expand its ecosystem by building an add-on marketplace.
