Episode 200: Building a Minimal Lovable Product with Tomer London
I recently had the pleasure of interviewing Tomer London, co-founder and Chief Product Officer of Gusto, on the latest episode of the Product Thinking podcast. Tomer has an inspiring journey, having led Gusto from its inception as a payroll provider to a comprehensive platform that supports small businesses with benefits, HR, and more.
During our conversation, Tomer shared his insights on how Gusto maintains its core mission of creating lovable products, even as they expand their offerings across diverse markets. I was particularly struck by his emphasis on user experience as the foundation of their success. He explained how their team ensures that every product decision aligns with this goal, fostering a culture that prioritizes intuitive design and emotional connections with users.
We delved into the frameworks Gusto employs to enhance user experiences, focusing on the three essential pillars of functionality, intuitiveness, and delight. Tomer also shared a delightful anecdote about how they celebrate payday with their users, transforming a routine moment into an engaging experience.
Read on to discover how we unpacked the strategies behind Gusto’s impressive growth and learn valuable lessons on maintaining user-centricity while navigating the complexities of product expansion!
You’ll hear us talk about:
09:50 - Minimum Lovable Products
Tomer shares Gusto’s unique approach to MVPs (Minimum Viable Products) by aiming to create a “Minimum Lovable Product” instead. This approach centered on crafting a simplified version of Gusto’s payroll software that not only worked but delighted users by exceeding their expectations. To achieve this, the team launched an early version that covered only essential payroll functions in California but delivered a smooth, user-friendly experience that left a lasting positive impression. For example, they introduced "employee self-service" to allow employees to input sensitive data independently, removing the awkward in-person interactions previously needed. This focus on delivering a lovable product proved effective, leading to strong word-of-mouth referrals and high Net Promoter Scores (NPS). Tomer’s focus on an MLP rather than just an MVP underscored Gusto’s commitment to building a product that customers would passionately endorse, setting the stage for organic growth and sustained customer loyalty.
24:00 - Balancing Growth and Infrastructure
Tomer discusses the delicate decision-making process Gusto undertakes when balancing growth with building sustainable operational infrastructure. He highlights that as a product or service gains traction, the company must choose between continuing rapid customer acquisition with a growing operational team or pausing to automate and streamline back-end processes. For startups, where growth is an immediate goal, this decision becomes especially challenging. Gusto approaches this by monitoring unit economics, where they focus on both growth and improving efficiency over time. Each quarter, if Gusto’s unit economics haven’t improved alongside growth, they halt further scaling until they optimize processes. Tomer emphasizes the importance of this dual focus for sustainable scaling, illustrating it as a strategy that Gusto has successfully applied across product offerings, such as health insurance and tax credits.
28:57 - Product Lawyers: Transforming Compliance into an Asset
Tomer shares how Gusto has made compliance a competitive advantage by embedding dedicated product lawyers within certain teams. For products with heavy regulatory needs, such as payroll and financial products, Gusto’s product lawyers work closely with product managers, designers, and engineers to innovate while staying compliant. This proactive approach allows the legal team to co-create solutions rather than act as a “no” force, fostering a collaborative environment where lawyers actively participate in product innovation. By having embedded compliance experts, Gusto turns complex regulatory landscapes into opportunities to deliver secure, innovative products—a capability they have used to create strong relationships with regulatory bodies and navigate challenging compliance requirements effectively.
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Intro - 00:00:01: Creating great products isn't just about product managers and their day-to-day interactions with developers. It's about how an organization supports products as a whole. The systems, the processes, and cultures in place that help companies deliver value to their customers. With the help of some boundary-pushing guests and inspiration from your most pressing product questions, we'll dive into this system from every angle and help you think like a great product leader. This is the Product Thinking Podcast. Here's your host, Melissa Perri.
Melissa - 00:00:37: Hello, and welcome to another episode of the Product Thinking Podcast. Joining US today is Tomer London, the co-founder and chief product officer of Gusto, a leading HR technology platform serving over 300,000 small and medium-sized businesses across the US. Tomer has been instrumental in transforming payroll benefits in HR management through innovative solutions that simplify the lives of business owners. With a background that includes founding Vizmo and working as a researcher at Intel, Tomer brings a wealth of experience in product development, technology, and leadership. At Gusto, his focus on building a minimum lovable product has helped drive the company's success and shaped its reputation for creating solutions that customers truly love. I'm so excited to talk to Tomer today about building Gusto because I'm also a Gusto customer. But before we jump into that, it's time for Dear Melissa. So this is a segment of the show where you can ask me any of your burning product management questions, and I answer them every single week. So let's see this week's question.
Dear Melissa, I am responsible for the development of an internal web scraping and data processing tool. Because this is an in-house product and the direct customers are my colleagues, I struggled to come up with usable metrics that tie directly to the goals of the business as a whole. Do you have any thoughts about how I should be thinking about this?
So when you think about what makes businesses successful, it's that we have a higher revenue than we have of our costs. And that makes up our profit margin, which makes up our EBITDA. So when you think about internal tools, a lot of the times they're there to enable people to do their jobs, which are all associated with a cost. If you're building an internal tool like this, that's about web scraping and data processing, it sounds like you might not be on the revenue-facing side. You could be on the cost-facing side. And maybe what you're doing is helping to make the people inside efficient so that you can keep your margins higher in the organization. So what I would do to try to figure out what are the metrics that you're looking at and what is the problem that you're solving is why do people use your web scraping tool internally? What are they trying to do with it? Are they getting their jobs done to be able to package this and sell it out there to the organization? In which case, that's the efficiency metric where you'd be looking at cost. If they're doing it for analysis on the business, again, that's on the cost side. It's helping with the operations to actually run it. But you can start to get back into the why, why, why, why, why are we doing this that will help you tie it back to the business value. So let's say it's actually an analytics tool. So what you're doing with this tool may be helping you inform your strategy decisions or inform what you should be doing next. There's a cost associated with that. That can help make sure that you are reducing the risk in your decisions, and that will help lower the cost of failure. But also, if you're making the right decisions, you should see the revenue go up. How can you help with the accuracy of the data processing to make sure people can make the right decisions?
That could be one way to look at it. From what you're describing to me, I think you're probably on the efficiency operation side. So I would really drive down into, do we optimize our processes and can I optimize these tools to help empower people to do their jobs better? Because the better that they do their job, the more efficiently, the better the whole business runs. And that's how I would start to think about it. But if you're unsure, ask your leaders how this tool fits into the whole way that your business operates, right? Why are the people who are using it, using it? What's important about it? Why do you actually have this versus an outside tool? What makes this special for the business? That's going to help you uncover your answer and help you set some metrics around it. I hope that helps. And again, if you have any questions for me, go to dearmelissa.com and let me know what they are. Are you eager to dive into the world of angel investing? I was too, but I wasn't sure how to get started. I knew I could evaluate the early stage companies from a product standpoint, but I didn't know much about the financial side. This is why I joined Hustle Fund's Angel Squad. They don't just bring you opportunities to invest in early stage companies, they provide an entire education on how professional investors think about which companies to fund. Product leaders make fantastic angel investors. And if you're interested in joining me at Angel Squad, you can learn more at hustlefund.vc/mp. Find the link in our show notes. Hi, Tomer. Welcome to the show.
Tomer - 00:04:52: Hello, nice to be here.
Melissa - 00:04:54: I'm excited for you to be here too. I just told you before we jumped on that I'm a Gusto customer. So I'm really excited to see how this all came about and what you guys have been working on.
Tomer - 00:05:03: I love hearing that.
Melissa - 00:05:05: And I love talking to people who actually build the products that I use. So this is exciting for me. Can you tell our audience a little bit about what got you to start Gusto? Like what led you to say, hey, this is a problem I need to solve?
Tomer - 00:05:16: I love small businesses. I grew up in a house where my dad and mom have a small clothing store. They've been running it now for over 35 years. So for me, I grew up after school going there and helping organize the inventory and clean and answer the phone calls and just kind of do anything I could do to be helpful around the business. And I actually got into software development because at one point, my dad asked me to be in charge of the inventory and making sure that we have enough shirts and jeans in the right models and the right sizes and all that stuff. And I had all these lists. And then at one point, I was like, you know what? Computers should be really, really good at remembering things. You know, my scribbles were not good enough for that. So I was just lucky because like a couple, like the store next door, next to my dad's store, this is in Israel, was a falafel shop, which was very good. But the store right after that was a bookstore. So I went to the bookstore and asked for, you know, I described the problem, what I wanted to solve with inventory. And the guy there was lucky for me, knew about Visual Basic 6. So he gave me this Visual Basic 6 book, which was in Hebrew. I read it and I started building something to solve the problem that we had in the store. And so I built this very, very simple, super simple and basic, you know, inventory management thing that ended up being used a lot.
We used this in the store all the time. My dad got a 386 computer just to operate the software. That made me super proud. And I knew that it was something that's been, that can be really helpful. So that's really how I started in software was just really building software for our small business. You know, I had no idea that, you know, a decade or two later, looking back, I would be building software for small businesses. But, you know, looking back, like that's how the dots connect for me. And I just feel incredible passion. Everyone here at Gusto feels incredibly passionate about helping small businesses because they're often the people who are underserved. You know, small businesses wear all these different hats. You're the seller and you're the, you know, you're the janitor and you're the accountant, everything on you. So if we can build tools to help them be more successful, this is an incredibly satisfying type of work for us.
Melissa - 00:07:14: I'm excited you're building it too, because it definitely solves a need for me. And Gusto started really around payroll and helping people manage payroll, do all that. Can you tell us a little bit about what made you want to concentrate there? And how did you start building Gusto?
Tomer - 00:07:29: Working in products, like the worst case when you have a product idea is you go talk with customers and you tell them about the idea or you show them for a time. They're like, oh, yeah, that's nice. Uh-huh. Yeah, that's interesting. Would you pay for it? Yeah, maybe. Maybe I will. And unfortunately, that happens 90% of the time. The other 10% of the time when you're really, really lucky, you get very strong emotion. It could be a negative emotion like, ah, this sucks. I would never use this. At least, well, you know what to do with this. Maybe move on to the next idea. Or you get like, holy crap, like I want this. And when we were talking in the early days, Josh, Eddie and I, when we were talking about with small businesses to kind of figure out where do they need help the most. Every time we talk about payroll with them, they just got to this very intense place. I had multiple people started cursing about, you know, their current payroll providers and why they make it so difficult and expensive, so much, so manual. You know, it used to be with payroll. Think how crazy this is.
It used to be that you had to call someone on the phone, like call your rep, tell them what you're going to do in payroll. What's your hours? Or even worse, I need to fax them the hours every time just to make payroll. And you had to do it every week or every two weeks. And if you wanted to sign up to a new account, if you're just starting out, you have to actually meet the rep in person. They had to come to your office and verify that you're a real business. So that was like an insane kind of situation. People really, really hated that manual, expensive, slow experience. They want to do it from their phone. They want to do it from the computers. So the problem was that customers had very obvious thing to see where just looking at the emotional toll that it took in people, when we spoke with them, and that's what we were looking for. We're looking for that emotional response. Now, on the other side, if you want, we could talk about like all the reasons why other people didn't build a payroll product back then and why it was so difficult. But we could talk about that if you want.
Melissa - 00:09:10: I'm curious about that too, because I never got to experience all that frustration because my accountant immediately when I started this business was like, hey, I'm signing you up on Gusto. Let's go. No, no, this is easy. It's probably the easiest thing I did to start my own business. But I have heard horror stories about payroll and all that from other people. So I'm really curious, what made it so complex?
Tomer - 00:09:31: So there's two reasons when we were out there, you know, raising money for Gusto, where in very, very early stages, our angel investors or other investors said, you know, I'm not going to invest in this. It's not going to work out. The two were, the first one is like, it's going to be very hard for you to get customers because it's hard to find those small businesses. They're everywhere. And, you know, we don't have the budget to go do mass marketing. And the other reason was like, how are you going to build payroll software? No one built new payroll software for decades. Let's talk about the second one for a second. Payroll is really complicated. In the United States, you have 50 states. Every state is like its own country in terms of taxes and payroll taxes. When you want to do payroll, what you really want to figure out is first, you need to figure out what are the applicable taxes? What taxes does the employee need to pay? Does the employer need to pay? And there's tens of thousands of tax codes in the US, depending where you live, depending where you work, sometimes depending which school district you belong to. So you need to figure out which taxes are right. Then you need to figure out how to calculate them. And those things change sometimes on a quarterly basis. You need to know exactly what's happening. And then you need to obviously, you know, build it all into code and make the payment to the employee. So a bunch of FinTech financing and kind of moving, you know, hundreds of thousands of dollars per paycheck, sometimes more. And then you also need to pay the taxes and make the filing. So. So payroll, it doesn't end with a click of a button and money moves.
It actually takes sometimes, you know, it takes quarters and sometimes years to go and do all the filings that are connected to payroll. So it is all this incredibly complicated, complex regulatory environment that anyone who does payroll needs to be a part of. So when you go to these big companies that have payroll department with dozens and dozens of people, you ask, what do all these people do? Well, what they do is they actually they learn and they connect with all these local tax agencies that their employees are a part of- They make sure that they withhold the right amounts and they make the right tax payments and all of that stuff. So payroll is really, really complicated. And that's why people didn't start payroll companies for decades, basically, before Gusto. And the truth is that we didn't really know how complicated it's going to be. You know, we were just like, okay, how complicated could it be? So we learned that along the way.
Melissa - 00:11:28: It sounds like a little bit of a trial by fire there when you got into it. Was it surprising to you how much there was that went into it?
Tomer - 00:11:34: Yeah, absolutely. So, you know, we started with just focusing on a very simple use case, right? Like, let's just solve payroll for a simple company that is only older employees are in California where they don't have benefits. They don't even have hourly employees. They don't have contractors. Like a very, very, very simple employer that, by the way, looked a little bit like our startup and we were just us. And then let's see if we can calculate these taxes. Let's see if we can pay those taxes. Let's see if we can do that. And once we were able to do that, that kind of gave us confidence. Okay, there's something here we can go and kind of scale beyond that. Now, the truth is that the way we built that initial version is very different than the way our system kind of evolved over time. Because as we learn about all the crazy requirements of different states and regulations, all that stuff, we had to rethink how to build this. And we have to kind of rebuild the system multiple times to today to a place where it's extremely robust and kind of works across the whole nation. But it took really a decade to build this.
Melissa - 00:12:29: It makes me think I was talking to somebody about Gusto and they went to me, I think this probably a year or two ago, they went, oh, isn't that only in California? And they must have looked at it from when you built in California. I was like, no, I've been using it with like employees in four, I think we have five or six different states, and it works seamlessly. So that's interesting that you started with that use case and expanded. Kind of like, leads to my next question. When you're a small startup and you're trying to figure out what slice do we take? And a lot of times we talk about MVPs in startups. How do you do that when you have such a compliant product, right? That has to integrate with all these different agencies, has to really make sure that you're filing things correctly. Some people might think that's really hard to like, slice down.
Tomer - 00:13:08: Yeah, absolutely. I think it is hard often to slice down. And I think that's what makes product management and product building so interesting. Like these are not obvious things. I'll tell you our approach for this. So it started with just understanding of, like what are we trying to prove here, right? Like you're starting from zero, which is really wonderful because you're playing slate. And then you need to figure out like, okay, what are you trying to prove in every point of time? So it could be like, oh, you're in a sort of a company and sort of business that the technology is really, really easy. So you don't need to prove the technology. What you just need to prove is, you know, like customer acquisition. So then really the focus would be there. For us, when we started, like it was, again, those two things. We had to figure out that we can build a payroll product. And then the second thing is we can actually get customers. And the way we believe that we'll be able to kind of overcome the challenge of how do you get these small businesses when you don't have a lot of budgets, very, very hard to build small business distribution, is with customer love. So the idea was this. It was if we build software that exceeds expectations from small businesses so much, that they absolutely love it, they rave about it, they rave about it online, they rave about it in person, that will create this word of mouth. And similar to other kind of a lot of consumer applications, that's really going to be the engine for our growth. That was the goal. And there, there you have this hypothesis that you started with, which is creating something that the customers really, really, really love. So the goal there, when we were to answer your questions around like, okay, where do you start? How do you cut things down?
Is we wanted to build the simplest, smallest thing that will help us prove the hypothesis, that it's possible to build a payroll product that people are absolutely going to love and talk about it nonstop, okay? So what did we do? We focused on this narrow customer, which is minimum compliance requirements for us back then, which is just California, no hourly employees, no contractual payments, no benefits, like, really, really kind of tiny audience. And we built what we called like a minimal lovable product with the idea of like, it needs to be lovable. And then we measured on the other side when we had customers do it, like what's our NPS? How many people actually refer? We measured on the other side, what's the product market fit survey results and things like that. And we discovered that, luckily, we discovered that actually we're able to exceed people's expectations out to a place where they were in love with the product. Which is crazy. Like, why would you fall in love with a payroll product, right? And the answer is because the expectations there were extremely low and because it was a moment in time where people's expectation of technology increased dramatically, where technology was not just tools and software to do things, to program, but rather it was to take you by the hand and like really take every single step of the process, be your guide, be your advisor, you know, walk you through the whole process and not just be a tool that you use and you got to read a manual to go and figure out how to use it.
Melissa - 00:15:52: When you think about what about your product people love, what were the things in the early days where people said, this is amazing? Like, what did you do differently, I think, than other people out there that really blew everybody's minds?
Tomer - 00:16:03: So one example is employee self-service. So it used to be before Gusto that when you added an employee to payroll, think about yourself as like a business owner or a manager, you had to ask the employee to sit next to you. And then you both look at the screen and you ask them for their information. Like, what's your SSN? You put it in. What's your address? You put it in. And then you kind of ask for them to not look and you put their salary inside, you know, and then like this entire awkward interaction that every single employee in America had to go through. I saw this interaction by just shadowing some customers in the early days. And it was so clear, like how both sides were suffering. You know, the employee felt like, oh, they didn't want to get something wrong. It's the first impression. And the employer was like, I don't want the employee to see other people's salaries. So it was just not a good interaction. So instead of that, what we build is employee self-service, which is, you know, as an employer, you say, okay, I'm adding Tomer to payroll. Here's Tomar's email. I'm putting Tomer's email. Then Tomer gets an email where they can come in and like, put in all their information and take their time, and do thoughtfully.
And then the employer can also on their side, take their time and kind of do things in an async way. So that's like one example of the sort of stuff that we did. Another example I would say that was, that's kind of more on the high level meta way is that you could just run payroll and, you know, run your business anywhere you go on your phone and online and on the weekends at night on your laptop, you know, you didn't need to call or fax or, you know, have this in-person meetings to go and do this stuff. So we had people, you know, kind of running payroll. People from the slopes, you know, like on their, on their phone before they, they, or, you know, I had somebody run payroll from the boats, you know, where they, they thought they, you know, they got their email. Oh crap. I forgot to run my payroll. And they click a button. They kind of do the whole thing on their phone. So these are the sort of stuff that I think really wowed people in the early days.
Melissa - 00:17:48: Once you have that initial traction, you've got your minimum lovable product out there, what made you say, hey, let's start to scale? Like what signals were you looking at? What types of feedback were you getting where you said, let's double down and invest into this and hit all the states and actually build it out?
Tomer - 00:18:04: We were looking for a place where we felt like, okay, in this early demographic, early audience, do they love the product? Do they stick with the product? Are they happily paying for it? And once we felt confidence there, then we started expanding. So then, you know, we added hourly employees. Can you do a good job for hourly employees? Okay, cool. What other type of tools do they need? We added support to contractors. We added support to more and more things, benefits, more and more things. And every step, we never took the next step until we were sure that people love the experience and they love the product. I use the word love a lot because I think for our audience, it really, really matters. If you're building, like big enterprise software or, you know, I don't know, FinTech, like something else, maybe that doesn't, it's not your strategy. But for us, like, that's how we grow. That's how we win. We win because customers love the product. We didn't invent payroll. You know, payroll was already there. Everybody was getting paid before Gusto. So that's our innovation is to kind of add this user experience innovation.
Yeah, so that's kind of the step-by-step process. It was always about thinking about the current step. Did we get to customer love? Great. Now we are next to ready to expand. Some of the, you know, the more, the easier thing to expand to in terms of, like just the product logic was geography. All right. Well, we're in five states. It's state number six. There was obviously, like a lot of thoughts about what should be the order of the states and, you know, complexity and things like complexity versus, you know, like the size of the state and all that stuff. But the thing that a little bit harder is to figure out when do you expand to a new product. So how do we expand from, you know, payroll to benefits to HR to things like today? Like, you know, tax credits and performance management and, you know, poll surveys and, you know, hiring tools and like all the other stuff that we do around teams. And I think that that's like a little bit of a different framework for that.
Melissa - 00:19:43: And how did you think about it when you started to expand it? I know that when the health insurance benefits came out, like that was something that we bought for my team. We used Gusto. And right at the beginning, I could definitely tell it was something you were testing because it didn't work necessarily for our company. But then like six months later, all of a sudden, like we were eligible for it. So it was like watching the early days of this rollout and seeing who was eligible, who was not for it. How did you decide, hey, let's go into benefits. Let's go into these next. And how do you handle all those optionalities, right? Because you could solve so many problems for, like SMB businesses. We all have a million problems. How did you decide that those were the right ones?
Tomer - 00:20:18: So we use this thing that's called the horizon framework. The way we use it is, you know, every company does it differently. Here's how we do it. There's three horizons. There's your core business. There are your expansion opportunities. And then your moonshots, right? One, two, and three. And you want to basically top down, figure out in the beginning of the year, like, what's my allocation of resources for each one of these things? So you could say, for example, oh, it's 60% are core and 20% are expansion. And then another 20% are moonshots. And once that decision was made, and you make that decision based on your progress, basically, then the problem becomes a little bit smaller. Because now you don't need to, oh, should I use these resources for payroll or for this new exciting product that's new? It's like they're segregated. So you don't need to worry about it. So I think that's something that really worked well for us. Now we're in problem number two, which is like, okay, cool. Now I do know that I have X amount of resources to figure out on horizon, let's call it horizon three, like the moonshots, the brand new stuff that we've never done before. What should I do there? Right. And then it's a combination of multiple things. It's like, first, what is closer to what you're doing? So you're not totally out of the blue, you know, like building a random product that's like maybe seven steps away. Start with a step that's closer to you. But then on the other side, where's the big opportunity? Because for something that's like a moonshot that's starting with very little resources to get into eventually more resources, so you can justify it for yourself, you need to make sure that it's moving the needle. So you've got to really think about that, the revenue opportunity.
So, you know, it's these sort of, I think, thought processes that help you figure out with benefits for us. To be honest, to use your example, it was pretty clear that, you know, we need to add that because every single person who has employee benefits have payroll. So those things are tightly connected. And the cool thing is that if you build those two things into the same platform, which was, I think maybe there was zero companies that did it back in the day. Now there's more. But if you combine those two things together, it really works much better together because the deductions for payroll go directly into benefits. It's all connected and you employ onboarding, they can get paid, they can choose a health insurance. Like, there's all these reasons why you actually, those two products and bring them together make either product better. So we knew we needed to do this. And then the question is like, how do you get it out? Right? How do you, how do you start? And to your example, as a customer, you start by talking with a lot of customers and see that there's interest. So I've done, you know, dozens of calls pitching a product that was not quite there yet. And then it's like, you start with like, a similar kind of rollout of starting small, then you kind of keep increasing where you see customer love.
Melissa - 00:22:45: After working with hundreds of companies to transform product management, I've discovered one thing that consistently holds both organizations and product managers back from reaching their full potential, the ability to craft great product strategy. That's why I created Product Institute's latest course, Mastering Product Strategy. I've taken my hands-on experience and turned it into interactive lessons that will teach you exactly how to create strategies that drive real business results. Lock in your spot now during the presale with code holiday and save $200 before December 31st. Visit product institute.com today. When you're doing that too, I remember with the benefits part, I think you had some manual pieces on there too, where you were working with somebody, you were emailing them back and forth. It wasn't all automated at the beginning. And I love watching products start out with that so that they can learn. What was the approach there? And then how do you think about what work you take on manually and when you need to start to tip and automate it?
Tomer - 00:23:35: That's a great question. I think a lot of products that are meaningful and important in the world are really hard to build totally automated from day one. Or in other words, if you do it, it will take you way too long. So for you to quickly get out there and kind of prove the hypothesis, prove that you can get to product market fit, it's wise to use some people in the background. So it could be for us in benefits. So we built, like an enrollment flow that for the customer, it feels like they can choose their benefits. It's all magically there and it's all working. And when you click and you choose it, perhaps it tells you, all right, we're enrolling you right now, dot, dot, dot. You know, you get confirmation the next day. The customer may be expecting that it's all technology now. But truly back then, at least when we started, there were people in the back end that were calling up the carriers and trying to get the right codes and trying to kind of make it all happen for our customers. I think that there's kind of two lessons here. The first lesson is you have to have a vision of how you are going to eventually automate all or most of it so you can get to good unit economics, right? I think some startups start with like, oh, I can totally start with a bunch of manual things in the back. And then, you know, over time we'll figure it out, but they actually don't figure it out. And they end up like being extremely manual companies. That's very, very hard to scale. It's very hard to scale. They get a lot of customers. It's very hard to get good unit economics. And, you know, that's often not a venture business.
So there's been a bunch of these kind of companies. So kind of pitfall number one is make sure you have a plan. Like, you know, if things do work, if you do have resources to invest in it, can this be automated, right? And how? And then I guess pitfall number two is the opposite one, which is like, oh, you know, we don't want to do any manual process. I don't want to have any people on payroll that just do manual things. So let's just automate it all from day one. And the problem with that is that often these are long, long slogs of product development. And until you have something out there for the customer that's actually good enough, you're tired. And you may not have it in you to either even launch it because it takes too long to build. Or when you launch, you just don't have it in you to do another iteration after you get customer feedback. So, you know, these are the two pitfalls I would try to avoid.
Melissa - 00:25:35: I've seen a lot of companies who do not do that whole vision of the automation from the beginning. But I see a lot of large companies get into that trap too. Because it's like, oh, we're not going to run out of money. But then you look at this cost center that they have and they've been doing it manually forever. They got 800 people doing it. But there is absolutely no vision about how we can automate it at all. So I think it's a really sticky trap to end up in.
Tomer - 00:25:56: And it's a hard thing because what you need to do, if things work out, if you're successful, if things work out, if customers want this, they want to buy. So then you have more and more and more customers. And then you need to decide, am I going to kind of keep building this operational team or am I going to ask this to say, okay, pause, stop, slow down. We're not going to actually monetize and kind of jump into all this growth. We're going to slow ourselves down to build the infrastructure in the back end to support it. And that's hard to do as a starter because you always want growth. But it's the sort of stuff that I think you've got to strike the right balance.
Melissa - 00:26:26: A good point because it's possible to just add more people probably fairly quickly, right? Rather than automating everything right away, like you said. So there's this balance of do we collect more revenue and just do it manually right now? Or do we stop and automate it and say, we have to cap this at this certain point and then go automate this stuff. When you were thinking through that with your new features and your new products that you're launching, how do you kind of come up with that cap when you realize like, hey, this is as much as we could possibly handle before we should start automating it, right? Or we should never go after this with manual processes with people.
Tomer - 00:27:00: We don't necessarily have a cap, but what we do have is an expectation that the unit economics are going to show consistent growth. That is the consistent, sorry, improvement that is taking you to where you want to go. So, for example, it can be like, you know, we're starting day one. We look at the unit economics, they're terrible. Like 10% margins because it's so much manual effort, you know. And then what we tell the team is, okay, you can keep growing this, but you can only keep growing this if, in addition, you're improving the unit economics as you go. So then, like, you look at, you know, you touch base next quarter, you know, you grew 2x, awesome, you grew whatever percentage. But how did the unit economics go? If you didn't improve the unit economics, like, I don't think we should grow this. Let's stop. Let's stall until we go and we figure out how to improve our unit economics. So that's kind of the way we've been running this across, like, multiple different efforts, you know, whether it's health insurance, whether it's retirement, other type of benefits, whether it's, like, things around, you know, employee pay advances, tax credits. We have a bunch of these businesses that have. Like, I have a back end side to it, but they kind of all follow the same formula of, like, of starting with a vision of how you can create great unit economics and then keep working towards the improvement of the economics while you grow. And it's not that, you know, we got everything right all the time, right? Obviously, sometimes we launch the product and we didn't get any of it. Like, bad unit economics and no one wanted it. So we had to kill the product. That was not fun, right? So those things happen, too.
Melissa - 00:28:21: What was one of the products that you had to kill?
Tomer - 00:28:23: So one product that comes to mind to me right now is QSERA, QS, Qualified Small Employer HRA. So it's basically one structure for health insurance. We launched it a few years ago, and I was so excited about it. I was absolutely certain that's the future of health insurance because the nice thing about it is that it enables the employers to put in how much money they want for health insurance, like $100. They can't meet the $400 or $500 that's usually the cost these days. And then the employee can go in and use that too by their own health insurance. And, you know, we built this minimal lovable product. We shipped it to customers, and it was like pulling teeth. It was really hard to get people to use it. And again, it was low unit economics because there was a bunch of like manual stuff in the back-end. We tried, we tried, we tried. We kind of gave it, I want to say, four to six months, and we just had to, you know, remove it. The biggest learning for me there and the reason why it didn't work in retrospect is because when it comes to their health insurance, they don't want to take unnecessary risk. And it feels like, oh, this is like. And innovation around like the kind of the tech structure around health insurance. Maybe I prefer to not even touch health insurance instead of offering something new that I'm not confident in. And, you know, maybe it's our, you know, maybe we didn't execute well on the vision. But I do feel like that was something that I learned from this, which is like, there are areas of what people don't want to innovate, actually. Not yet, at least.
Melissa - 00:29:44: Yeah, that's a really interesting one because it is so personal to people, right? Health insurance or things like that, that it can make them feel a little nerve wracked if they're doing something new or something that's not out there. Like what if they roll back those legislations? What if they do that in the middle of it? I can see all of that coming into play. And with a lot of your stuff too, there's all this like compliance legislation. Like you said, things are changing almost every day. How do you keep on top of all of that as a company?
Tomer - 00:30:10: It's a real good point. I think Gusto touches just all these areas where there's extremely, you know, amount of compliance and regulation requirements. So payroll, payments, health insurance, retirement, you know, consumer FinTech, like we do all that. And I think for us, like in a way, I believe that why are things, certain things regulated, some things are not. I think things tend to be regulated if they're really important, if they matter a lot, if really good things can happen, but also really bad things can happen. So we tend to work in these areas. So when I look at this, it's like, we tend to work in areas that are heavily regulated because these are areas where actually you can really make a significant impact on businesses, on our humans and people's lives. So that's kind of a side to it that you have to live with. And then we made compliance like a competitive advantage. Like, I think we have the best legal team in business, to be honest. Like they're not just like, you know, know the rules and understand the rules and are connected with all the different agencies in the US, but they're innovators, they're creators. You know, when you work with a product lawyer at Gusto, like they, as a product person or a designer, like they're with you trying to figure out solutions, trying to build things that were never built before using their legal background and connection. So I feel like you can kind of make, at least for us, like we made that as a challenge, perhaps like an asset. We made it something that we're really, really good at and we're always going to be investing in.
Melissa - 00:31:30: Just mentioned something like a product lawyer. How do you structure the legal teams to work with the product teams and the UX teams at Gusto? That tends to be one of the biggest issues I see in a lot of companies, especially large companies who are trying to embrace more of a product culture, trying to bring on here. I hear from product people every day, like, compliance doesn't let me do it. I get no all the time. They don't even want to sit here and think about the risk. It's just no, no, no. What do you do to make sure that you're not hitting those areas of friction?
Tomer - 00:31:58: So we have two working models, and it depends on the type of product. Some products are heavy, heavy compliance-related, and a lot of the innovation is going to be connected to the nuances of the compliance requirements. So then what we have is an embedded, dedicated product lawyer. So it's like a lawyer, that's their job. They went to legal school, but they're here in Gusto to create, to innovate, to design. They're embedded just like the designer, the PM, and the engineer on the team, and they work every single day together. There are some teams that don't have such a high level of compliance requirements. For example, the team that's working on our employee survey or performance management, these are things that they have some compliance requirements, but it's not as core to the day-to-day. But these folks are more like an advisory. So they have somebody who, they have a person who they consult with and they connect with on a regular basis, but they're not a part of the day-to-day team and truly dedicated just for that effort. So that's the working model. The second thing I'll say is one of the hardest things for 4 PMs to get stuff done often is because they don't know how to work with the law and like they don't know how to work with lawyers. And a lot of these people come from like being, you know, in school, they were A plus students, they got all the good grades and they're kind of high achievers. So for them, they look at the law a little bit black or white. It's like, okay, the lawyer said that it's risky, so I'm not going to do it because I want to protect the company. I don't want to do something that's risky. You know, so the lawyer said no, the lawyer said no, the lawyer said no, and I'm not a legal expert, so I might just listen to them.
But the truth is that, that's the wrong way of looking at the cooperation with lawyers, where the truth is that like a good product lawyer would, their job is to explain to you the risks that are involved in certain decision making and offer some paths of potential, you know, to go forward. Some of these paths are going to be high risk. Some of them are going to be low risk. You always need to ask, like, when we say high risk, what does it mean? What's the worst that can happen? And what's the likelihood of that thing happening? So what's the expected value for each one of these kinds of paths? And then it's up to the product person to make the decision. They, in the end, are empowered, at least at Gusto, they're empowered to take on all this information about the potential risks involved and then take a decision that tries to optimize what's best for the business. So what's great for user experience, what's great for the business in terms of our metrics and impacts and outcome. Then also, let's not take unnecessary risks that can take the company down, obviously. So you're going to need to take all these things together. It's not unlike when you work with your engineer or when you're a designer and they tell you like, here's the different paths of doing things. And like, here, this is hard to do. Can we do something differently? It's kind of similar.
Melissa - 00:34:24: I really like that you said that. I work with a lot of healthcare companies and there was one company I was working with. And I remember we had so many teams dropping everything to go after this compliance thing that we needed to put into place. And it was one of those things that popped up. We had to be compliant within like a month, two months to go do it. So everybody's rushing to do it. We stopped work on all of these features. And I went and I asked the lawyers, I was like, so what happens if we don't do it? And the fine, like nothing basically, like no jail, nothing. But there was like a fine of like $1,000 every year that you didn't do it. It's like, okay, so do we need to do this right now? But everybody was panicking, going, let's remove like all this stuff from the roadmap that's gonna help us make millions of dollars and instead focus on this thing that's gonna be like $1,000 we have to pay once a year if we don't do it. And that type of risk, like you're saying, I think is so important with product managers. And I tell product leaders about it too. I'm like, what's the worst that can happen if we don't do this? That's the first question you should ask.
Tomer - 00:35:18: Totally. There's also sometimes things you can do with regulatory bodies with just good communications. For example, sometimes, you know, we work in the consumer finance side like Gusto also where employees get paid through Gusto. They can have access to, like a high yield savings account and some tools to get paid earlier and things like that. And in that world, there's a lot of regulatory. The regulatory environment is not stable yet. Like things are changing all the time. So then what do you do in these situations? Like if you go to, you know, the best product lawyers, what they will say is like they'll say, okay, well, we don't really know, here's all the stuff that could happen. And that's like a really, really big universe of choices. So really complex. One thing that you could do in these situations, for example, and what we're doing is you communicate with the regulatory agencies. You send them a letter, you talk with them and you say, hey, you know, here's what we expect. Here's what we understand from the law. Here's what we're going to do. Let us know if this is correct or incorrect, because we want to collaborate. We want to work well with you. Again, these are things that probably are not, you know, applicable for startups for three people. You don't have time for all of this. But, you know, when you're like, I would say like mid-stage, you know, you pass your Series A or Series B, you know, this is the sort of, and you work in a high kind of compliance area. I think this is the sort of capabilities that you really want to have in your company because you can build better products and better business as a result.
Melissa - 00:36:32: Yeah, those sound like really key capabilities for you as well. And I like how your stories too are showing me how all these different areas emerged over time. For that, do you have a legal department that's just partnerships with regulatory or product managers involved in that? What do those types of things look like and how do you decide when we need to form a real partnership like that and go forward?
Tomer - 00:36:53: We have a legal team and inside the legal team, there's like, you know, different legal functions or employment law, which is kind of internal just for ourselves. Like there is like that. There's a department focused entirely on compliance relationship with the different tax agencies. So they spend a lot of time on the phone getting to know the different people in different tax agencies across the country. And there's like hundreds of these there. And then there's like a team around like product lawyers that I mentioned earlier that it's all about creating and kind of that their world. There's a privacy practice. You know, this is like it's a pretty developed function at Gusto today. And I think it's one that we're very, very proud of. The other reason is because it helps us do new things. So when we come in and we start a brand new business at Gusto and, you know, often you, unlike when you start a zero to one, like, founder starting a new startup and you're really kind of on your own trying to figure it out. When you do it within a big company, like, you can use the existing resources.
So for us, if we're starting a new business within Gusto, we have this awesome lawyer legal team who are creative and like, really, really smart. And you'll go and talk with them. So we've been doing that a lot, for example, with our embedded payroll product, which is a product where we take the payroll infrastructure that we've built for Gusto and we enable other platforms to go and offer payroll powered by Gusto to their customers. So, for example, Chase is using us to power their payroll for their customers. Lattice is using them, using us to offer their Lattice payroll for their customers. FreshBooks is using us. So there's a bunch of these kind of platforms that use us. But when we started this, it was like a brand new type of business. Like no one, no one has done this thing before. It's a brand new market. So how do you do this? How do you build contracts for this? Who's liable for what? You know, it's all really, really complicated. It's nice things. You kind of bring in your friendly product lawyer next to you and start talking about these things.
Melissa - 00:38:32: Really interesting when you're talking about going into a market that nobody has really done before. This whole embedded payments, uh, well payroll, nobody was doing it. When you think back to your product strategy and the type of people that you need on a team to sift through it, sounds like you've got the legal side to go look at it. What else do you look at, for building that team to be able to execute on that well?
Tomer - 00:38:53: Yeah, well, it depends on the type of business, right? So I would say it kind of depends on where do you need your strengths. So when we started the embedded payroll team, we knew that, you know, what would make or break, whether this is successful or not, like obviously technology. So bringing in like a very, very strong technology leader that was really important. Second thing is operations, because actually a lot of the stuff that we're offering is, you know, customer support level two and tax operations for these businesses. So they don't need to worry. They don't need to spend the 10 years it took us to build a payroll operation. They can just kind of get it on day one. So that's an operation leader was really, really critical for that. And then the other thing is that for that business was go to market and specifically go to market after enterprises. We never did this here. You know, we always focus on small businesses, companies, 500 employees and less. And all of a sudden we're selling to like the biggest companies in the US, you know? So we had to bring in also someone who's really, really strong at this sort of thing. So I would say that when you start zero to one, it's really about, like figuring out what are the most important disciplines and then bringing the best of the best that you can for these. And that's when we started the company focusing again on small businesses, payroll in the very early days. Our first hire was a designer because we knew that, you know, that our innovation is user experience innovation. So we need to be, like freaking amazing and building great experiences.
Melissa - 00:40:06: With Gusto, you now have all these different products are in these different markets. How do you go back to your, like, core tenant of making it lovable for your customers? Like what do you do to instill that into your team and make sure that as you add all this complexity, all this different functionality, all these different products, it doesn't become overwhelming or just like a feature factory of a bunch of complicated UX?
Tomer - 00:40:28: Well, I think there's a few things here. So I think the first like having this as a stated goal and a stated way, a stated like insight of like, this is why we win. We win because of our incredible user experience, both software and human size, by the way, with customer support. That's why we win. When every single person knows this and then it's kind of ingrained in our heads, we make decisions knowing this. So it means that when anybody sees, like a problem or whenever it sees a bug, whenever it sees like, you know, this team is doing A, these others are doing B, and the result of that is like a terrible user experience, those things come up. So it kind of, it's like, almost like a kind of an, like a core part of just how we hire. It's a core part of how people work here in the day-to-day. And it's a unique thing, just like that is truly unique for us as a company. But it's also a bunch of tools. For example, when we do design critiques, when we look at user experiences, there's kind of three things we expect. We expect, when we think about great experiences, has kind of these three components. The first one is that it solves the problem end-to-end. So truly end-to-end. It means that, you know, if you, for example, need to deliver a W-2 for an employee in the end of the year, it's not enough to make a nice PDF and put W-2 in it. You'll also have a button to go and send it an automatic mail, like real snail mail to the employee because, you know, the customer needs that and they don't see this person, this thing in person. So solving the problem truly end-to-end, that's the first thing. It's about functionality. The second thing is about intuitive. Like intuitive means that I don't need to watch a bunch of videos and read articles in order to figure something out, how to do in the product.
When I look at the product, it tells me what to do. It tells me, this is what you need to do today. And then when I follow it, I just know what needs to be done and it's just intuitive to use. And the last part is delightful. And delightful. It's this idea of doing something that is beyond the expectation of the user at that point of time and capturing their emotions, capturing like here's an opportunity for an emotional connection with the customer. So it could be negative, like it could be like I'm stressed and like now you're helping me alleviate the stress or it could be positive, like, oh, I just finished this work and you helped me celebrate it. So an example there is, you know, we realized that when people get paid, surprise, it's a nice moment. It's a happy moment when you get paid on Friday, when you get the paycheck. So we made an entire like celebration around it with our payday email and a bunch of campaigns around like when you get paid, like it's just such a fun experience and like people talk about it all the time. And, you know, there's a bunch of work that we're doing there. But this is an example of like the sort of frameworks we bring into our work to make sure we don't forget what makes our product lovable and how do we keep investing in it.
Melissa - 00:42:51: Tomer, if you could go back to when you first started Gusto and tell yourself something that you've learned along the way, what advice would you give yourself?
Tomer - 00:42:58: The thing that comes to mind to me right now is to be patient. And I think being patient in the world of product means that we have this incredible ambition. We want to do so much. We want to be the entrepreneurship platform, the one place for small businesses to start building, grow across the whole, you know, US and across the world. There's so much. We have so much that we want to do. But the truth is that sometimes it takes time to build things that really matter. It sometimes takes time to go and build things that with sufficient quality. So kind of knowing that it's okay, that sometimes things take longer and having that patience is something that I feel like when I look back in the past 12 years, it's something that I know I was missing a bunch of time and it wasn't helpful. It's not helpful to be impatient if you're not taking it to a productive place.
Melissa - 00:43:43: Like that. I think I hate me to hear that right now too. I've been in a patient area, but it's great. Great advice for everybody out there building products and also starting their own companies. Thanks so much, Tomer, for being on the podcast. If people want to learn more about you and Gusto, where can they go?
Tomer - 00:43:57: Go to gusto.com and check out what we do. We keep growing. We keep improving our product. We listen to customers every single day. And, you know, although we just started with payroll, we do so much more now around benefits and HR and building your company. It's just, check it out. Then, yeah, I'm on Twitter and just Tomer London, one word.
Melissa - 00:44:14: Great. And we'll put all those links in our show notes at productthinkingpodcast.com. Thank you so much for listening to the Product Thinking Podcast. We'll be back next week with another amazing guest. And in the meantime, let me know any of your burning product management questions at dearmelissa.com. We'll see you next time.