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Disruptive Innovations? On-demand Pricing Models and Vendors

Written By: Predrag Jakovljevic
Published On: April 1 2005

Effect of Transition on Vendors

Quick ramp-up, lower implementation, and the almost non-existent support costs of hosted software services makes utility or on-demand pricing appealing customers. However, vendors embarking on these new pricing models (see Parts One and Two), which treat software as a service, are sure to experience growing pains. Traditional upfront licenses provide a "big gulp" of revenue which decreases between releases. However, utility or grid computing, which is more or less a pay-as-you-go software-as-a-service, generates bite-size chunks of recurring revenue. Comparable revenue from the new model will emerge, but only over a longer period. This and waning technology-related services (and its revenue) can produce unsightly red marks on income statements. Moreover, eventual success is still, by no means, assured.

Organizationally, vendors must also make fundamental changes to sales and support processes for subscription or on-demand, transaction-based pricing. Consequently, the implications for business models are profound. Software vendors must rethink the kinds of functions they provide; how best to deliver those capabilities; and what approaches to take through the channel. Recurring revenue comes with the caveat of business model readjustment, and not only because the "piece of the pie" that resellers take will be quite smaller than what they were used to with licensed software. Value-added resellers (VARs) will now have to focus on volume and velocity. They will have to rethink their expertise and skills mix, particularly in the vertical savvy. In other words, solutions will now revolve in their acumen of automating and streamlining business processes instead in packaging software technology.

Other major potential hosting disadvantages include

  • Hosting is still nascent, with customers being early adopters.

  • Potential security risks exist, since customers' confidential and mission-critical data reside at the hosting provider's or ASP's location off-site.

  • Hosting becomes more costly over the long run, especially with declining traditional software license fees.

  • Hosting still offers little or no support for software modifications, customizations, or integration into key legacy systems.

  • Users will have decreased control over infrastructure and deployment, and dependence on the provider for the quality and prioritization of IT services.

  • Users will have little to no control over hardware and software upgrades.

  • Support costs are essentially negated and a monthly per user charge is assumed.

Yet despite these fears, the benefits of a more reliable, recurring revenue stream, single-instance implementation, and doing away with disruptive upgrade cycles makes the new business model attractive to vendors. Subsequently, this win-win combination which benefits both customers and vendors has already attracted a few vendors to the pure "software as a service" business model.

This is Part Three in the Trends in Delivery and Pricing Models for Enterprise Applications series.

Salesforce.com Spearheads the CRM Software as a Service Model

Lately CRM software has proven quite amenable to hosting because it is a static sales management and automation system. It can quickly reach a break-even point in the outsourced deployment model. Hence, Salesforce.com, one of the thought-leading providers of customer relationship management (CRM) and sales force automation (SFA) software-as-a-service, has espoused a sort of a disruptive innovation. It has recently rattled the CRM establishment with its hosted CRM solutions and appealing price and implementation advantages. Salesforce.com also offers a pure-play application service provider (ASP) system, designed specifically for the hosted model. The monthly per-user charge, which starts at $65 (USD), includes everything without an up-front software license fee. Reasonable cost, ease of use, intuitive user interfaces (UI), broad (but not terribly deep) functionality, and rapid deployment are the latest values that small and medium businesses (SMB) now worship and what Salesforce.com has embraced. Likewise, Salesforce.com has never been content to remain a mere hosted/on-demand CRM provider and has built a hosted applications platform and developed a CRM application atop of it. Salesforce.com even prospered during the IT downturn, by reaching the $50 million (USD) revenue mark in less than four years since its inception in February 2000. Consequently, it has one of the most successful initial public offerings (IPO) in 2004.

SalesForce.com claims to have exceeded a critical mass of users with over 190,000 subscribers in 12,500 companies, in over 70 countries. Customers pay a monthly, per user fee to access its Web-based CRM application. The vendor claims it can accommodate customer-specific configurations and that it interfaces to most major enterprise resource planning (ERP) and back-office systems. Perhaps it is the continuous upgrades and attractive product additions, like the customization and integration platforms, that keep customers coming. Its customers range from shops with as few as two users to Fortune 500 companies with hundreds of users. This has amounted to an estimated $170 million (USD) in revenues during Salesforce.com's last fiscal year.

Nonetheless, the forays of Siebel, the CRM leader, into hosting will also raise the bar through embedded workflow and analytics, built-in connections to back-office systems, and the provision to migrate and upgrade to the on-premise application. Besides this, Siebel claims the first and only industry-specific hosted software for industries like insurance, hi-tech, automotive, communications and media, financial services, life sciences, manufacturing, and consumer goods. It is the only one with fully hosted contact center capabilities, and has a scalable and secure hosting infrastructure via its partnership with IBM.

Similarly, the CRM giant also offers the ability to implement on-premise or hosted CRM solutions, as well as hybrid CRM solutions that combine the two. Indeed, the Siebel CRM OnDemandIndustry Editions offerings may provide it with the competitive differentiation needed to convince prospective customers that Siebel can offer deep, industry-specific CRM features at affordable rates. Priced at approximately $100 (USD) per user, per month (with an introductory offer of $70 USD per user, per month), the CRM OnDemand editions are viable options for extending Siebel's SFA, customer service, and marketing solutions to certain parts of larger firms—including small remote offices and foreign subsidiaries. It is also an option for channel partners, such as brokers, dealers, and resellers. Most recently, Siebel announced Siebel CRM OnDemand Release 6, which introduces pre-built, industry-specific solutions, advanced sales effectiveness capabilities, and an expansion of Siebel CRM OnDemand's analytic capabilities. Other features include the "mail merge" capability for Microsoft Word; pre-built support for reporting and analysis within Microsoft Excel; and enhanced customization. The product costs $70 (USD) per user, per month, whereas industry-specific solutions are also available for $100 (USD) per user, per month.

As a response to the challenge, Salesforce.com, recently announced its Winter '05 edition. Because the vendor is a provider of "software as a service" for customers by browser, and like its predecessor, Winter '04, the 2005 release does not require installation. Instead, existing users have immediate access to new features and tools. Among the available features is an integrated analytics engine with personalized dashboards that users can customize to show snapshots of metrics and sales key performance indicators (KPIs). Further, real-time alerts can deliver notifications of important events, such as contract deadlines, via e-mail, to both networked and wireless-connected devices. Enhanced workflow creates business rules and triggers to automate and standardize business processes, which to date have been the privilege of traditional, on-premise CRM software.

The Winter '04 release had a new contract management sub-module that helps salespeople create and track customer contracts. It also had enhanced integration with legacy, third-party applications, and popular desktop applications such as Microsoft Word and Excel. Additionally, it supported dozens of languages and all major global currencies. Equally notable, was the global translation workbench feature which provided on-the-fly translation and allows reports to be composed in the language and currency of choice automatically. As for letting users customize the behavior of a hosted CRM application, custom objects and so-called "s-controls" allow enterprises to extend the Salesforce.com database, and build custom applications, screens, and forms without the need for on-premise infrastructure.

Like earlier releases, Salesforce.com Winter '05 is available in multiple packages—Personal, Team, Professional, and Enterprise editions—which fit varying company sizes and whose costs vary accordingly. Furthermore, Salesforce.com also delivered its Web services-based integration platform for building hosted applications, sforce 5.0, to all users as part of the Winter '05 rollout. Also referred to as an "on-demand application server", sforce 5.0 should allow developers to customize, integrate, and extend the Salesforce.com UI, business logic, and data model. Users will also be able to host and store code for new custom applications, then use the salesforce.com service to deploy and manage them.

Likewise, Customforce.com, was also recently released. It is a new on-demand customization toolkit that eliminates the need for programming, yet still allows the customer control over every feature of the application. Modifications and customization are relatively simple with this toolkit. Salesforce.com also introduced Supportforce.com, an on-demand customer service and support application, in September 2004. With this, customers can deploy global contact centers and help desks fairly quickly without software using the platform.

This may reveal another trend in the CRM market that supplements the need for the integration to back-office and other enterprise applications. Rather than delivering "canned" hosted solutions, new CRM offerings focus on giving users more for less, including improved flexibility and customization, through configuration rather than through dreaded source code changes.

Other CRM Vendors

Similarly, other on-demand start-up CRM vendors, such as NetSuite, Salesnet, RightNow Technologies, or Intacct have delivered similar new tools and development environments that let user organizations customize their products. Database tables or custom code can be added to create unique functionality that, unlike conventional enterprise applications, will not break every time a new version arrives. Still, these vendors will soon have to balance offering expanded functionality with data quality services. This will need to be done without making the hosted technology too complex and thereby "fly in the face" of their differentiation from packaged on-premise applications. There are some indications of slower support response times and of the growing complexity of the aforementioned products because as the time goes by, users will require more functionality. One of the key value proposition and sales successes of hosted CRM has been its simplicity, but, if ongoing functional enhancements are needed by customers that have expanding operations, the cost-benefit equation might shift to the on-premise or hybrid model.

Another vendor with a value proposition along similar lines is ACCPAC, now part of the Sage Group/Best Software, that plans to expand its foundation built during the past few years and help partners move into the more predictable revenue generating area of hosted services. Interestingly, the hosting option was one of the few new dimensions that Sage and Best have always lacked in their portfolio (see Will Sage Group Cement Its SME Leadership with ACCPAC and Softline Acquisitions?).

Launched in 2000 and based on Computer Associates' Unicenter TNG infrastructure, ACCPAC Online hosting service offers applications with an ASP model. As a result, ACCPAC's solution providers have more options to tailor solutions that best fit customers' needs. The ACCPAC Online Preferred Accountant Subscription Services (PASS) program was thus designed to enable accounting VARs to become virtual ASPs (VASP), with ACCPAC being the ASP "in the shadow". In addition to what may be unique deployment flexibility, which allows selected applications to run either on the premise or to be hosted, ACCPAC may be the only vendor among its peers that is also an ASP. Finally, in addition to ACCPAC CRM, ACCPAC has long had success with hosting its ERP and accounting packages. Meanwhile, in the realm of accounting, Intuit recently claimed to have doubled the customer base of QuickBooks Online Edition during 2004, which 26,000 small businesses paying $20 or so per month for the accounting software.

This concludes Part Three of a four-part note.

Part One defined pricing options.

Part Two detailed utility computing.

Part Four will cover software as a service business model and make user recommendations.

 
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