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The Shots Heard ’Round the World
A turbulent economy is driving some on-demand vendors to reduce fees. Is a price war looming in software-as-a-service?
For the rest of the January 2009 issue of CRM magazine please click here
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Common wisdom in this industry tells us that CRM and related technologies are a must-have, with price a decidedly secondary concern compared to functionality. Yet when software-as-a-service (SaaS) became a viable means of delivering CRM, one of the selling points of that business model was its reduced cost versus traditional software. It was the birth of a generalization: Any SaaS will save you money.

Yet even in light of that generalization, there has been activity on the SaaS-pricing front. When Microsoft Dynamics CRM Online launched in early 2008, its monthly cost per user undercut every major player in the industry. By the end of the year, NetSuite had announced two other major discounting initiatives, in targeted efforts to lure users of SAP R/3 and Salesforce.com. Entellium, a hybrid vendor of both installed and SaaS applications, collapsed amid falsified revenue figures-thanks in part to a bottom-dollar price structure-and finally filed for bankruptcy in early December. (See "The Rave Is Over," Insight, December 2008.)

A handful of open-source CRM providers have also started pitching SaaS users, focusing in part on price benefits. Concursive (formerly known as Centric CRM) upped the ante by offering one year of free service for up to 100 users, and promising future charges at "half of the rates of competing on-demand CRM offerings."

With the array of competitive marketing pitches on the table, not to mention the global economic nosedive, it's worth asking: Is there a price war going on in SaaS CRM?

"I think there is a good prospect of that happening," says Jeffrey Kaplan, managing director of SaaS consultancy ThinkStrategies. The success of the SaaS model has led to an increasingly crowded marketplace. Some of them are large vendors with the resources to play with price. "Companies like Microsoft will try to undercut the market; NetSuite recently tried to do that."

Jim Steele, Salesforce.com's chief customer officer and president of international operations, seems unfazed. "When I joined [this company], we were competing against Siebel [Systems], SAP, and other traditional software vendors-we were the low-cost alternative," he says. "That was back in 2001, before the Internet bubble burst, before 9/11-those events came along and changed people's outlook, like today. Customers are very sensitive to cost and value."

Even so, Salesforce.com-now one of the higher-priced SaaS vendors-seems content to let its competitors bloody each other over pricing. Steele notes that, at the company's third-quarter earnings call, Marc Benioff, the company's cofounder, chairman, and chief executive officer, made clear his intention to hold the line on pricing. "Price is one of the criteria, not the most compelling," Steele says. "Versus other SaaS vendors, we talk about our track record, our partner ecosystem, and our customers. We get a premium because of those factors."

While Salesforce.com, like most companies in any industry, is willing to make a deal for the right major client, most smaller customers are paying the official rate. "I know some people who tried to negotiate on price and didn't get very far," Kaplan says.

At the extreme, some SaaS providers are leveraging open-source software's similarly low cost to deliver SaaS CRM on razor-thin margins. "There is a proliferation of players, especially at the smaller end of the scale, getting their foot in the door via the open-source model and adding value with services," Kaplan says.

While the potential savings for customers are large, though, there is no longer one throat to choke when something goes wrong when dealing with a vendor whose entire operation is in the cloud. "Google and other companies had outages and there was nobody to complain to," Kaplan says. Fear of that happening with business operations can drive customers to more established vendors.

"New players have to bring something to the table to differentiate themselves," Steele says. "If they don't have the track record, the functionality, or the customers, they have to lead on price. When you do that, it tells a story. A lot of these [lower-priced offers] smack of desperation to me."

Regardless of how the coming months play out, it's important that SaaS vendors and SaaS users maintain perspective. In our July 2008 feature, "Is Microsoft Winning the CRM Race?," the question of price was put to Laurie McCabe, vice president for SMB insights and business solutions at research firm AMI-Partners. Competing on cost is often a sign of oversaturation or commoditization, McCabe said at the time—not necessarily a bad thing. "Price competition doesn't worry me," she said.

"We know how much Salesforce.com is spending on marketing, so there's a lot of markup for [its] service," McCabe said. "We're due for some price pressure."

Every month, CRM magazine covers the customer relationship management industry and beyond. To subscribe, please visit http://www.destinationcrm.com/subscribe/.

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To contact the editors, please email editor@destinationCRM.com
Every month, CRM magazine covers the customer relationship management industry and beyond. To subscribe, please visit http://www.destinationCRM.com/subscribe/.
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