As the CEO of Salesforce.com, Marc Benioff alternates between being an enlightened capitalist who follows the muse of the Dali Lama and a 21st century rendition of the Playboy of the Western World.
The high-profile Benioff sees himself at the forefront of a movement toward a software-as-a-service business model that easily justifies the fact that a staggering 56 to 57 percent of the company's estimated fiscal 2005 revenue of $174 million to 175 million will be spent on sales and marketing.
But what makes Wall Street cautious is that Benioff unapologetically states that even as the company expects to grow revenue to as much as $285 million in fiscal 2006, marketing and sales costs as a percentage of revenue will remain in the 57 percent range.
The company's stock remains above its initial public offering level, but the bulk of the Wall Street analyst community seems to be neutral to pessimistic about the company's future prospects, given rising competition in this space.
For instance, NetSuite, which provides a range of integrated business applications using the same software-as-a-service model--also known as an application service provider--is gaining momentum. Best Software is in the early stages of bringing CRM and other business applications to market. Siebel Systems, now under the guidance of long-time IBM veteran Mike Lawrie, is reinvigorating its software-as-a-service offering. Oracle, following its bruising battle to acquire PeopleSoft, will also surely now focus more in this space. And Microsoft, although not deploying a software-as-a-service model directly, is leveraging its channel to become a formidable player in this space, alongside old midmarket CRM players such as FrontRange and Sage.
The one thing that differentiates all these players from Salesforce.com is that they are all quietly building indirect alliances in the channel, compared with Benioff's near total commitment to direct sales. There are a few Salesforce.com partners in the world, but mostly they get paid a one-time agent fee for turning customers on to Salesforce.com.
In contrast, other players share significantly more margin with their partners and allow the partner to get a cut of renewal license fees. The end result of the channel approach is that by this time next year, there will be a lot more feet on the street selling alternatives to Salesforce.com than there are former, high-priced enterprise application salespeople selling Salesforce.com.
In contrast, Salesforce.com has said it intends to significantly expand its direct-sales force and professional-services efforts sometime after June 2005.
In addition to encouraging increased direct-sales costs in a market dominated by small- to midsize-business (SMB) customers, Benioff has categorically ruled out the notion that Salesorce.com might lower its costs by outsourcing its data center operations to Sun or anyone else. This means that Salesforce.com will continue to incur the costs of running its application on Sun SPARC servers in its own data center. In contrast, NetSuite relies on Linux running on Intel servers to help create a cost infrastructure for multiple business applications that is lower for customers than the CRM-focused applications sold by Salesforce.com.
Siebel, meanwhile, has established a partnership with IBM to deliver its software as an on-demand service that should make them significantly more competitive as that service eventually scales.
Benioff scoffs at all his competitors, pointing to the company's 195,000 subscribers at 12,500 customers, which continues to rise at a very rapid clip. But it has taken Salesforce.com several years to reach a market penetration level that still only represents a fraction of the overall CRM market, never mind the overall business application market.
Many of Salesforce.com's customers will shortly be coming off typical 12- to 24-month subscriptions. Many of those customers are true believers in Software.com, the software-as-a-service model and, more importantly, they like not having to lay out capital to support internal CRM applications.
But just as many--if not more--of them are departments of larger organizations that turned to Salesforce.com as an alternative to IT organizations because, at that time, their company did not support a CRM application, or they are part of struggling companies that simply did not have the budget to get a CRM application installed. Or worse yet, they did not have the skills needed to get out from under outgrown, tired custom applications built on platforms such as Lotus Notes or even Quicken.
Many of these customers either view Salesforce.com as a stop-gap measure or a Hail Mary pass they threw up to buy time to get their arms around a desperate sales situation at their own companies. As such, it would be hard to classify them as true loyalists to Salesforce.com.
Many of them may opt for either more robust ASP alternatives, such as NetSuite, that go well beyond CRM. Others may opt to host a CRM application internally because their needs have evolved to the point where they need deeper levels of integration and customization, or more likely, have reached a point where the number of users they have to support has reached a point where it makes more economic sense to host it themselves.
What all this means for Salesforce.com is that the cost of renewing customers will increase, the cost of getting new customers will increase, a direct-sales model managed by a top-flight management team will rack up millions of dollars in deferred sales and stock compensation, and the cost of maintaining IT operations at Salesforce.com is likely to be higher relative to competitors. Balanced against that is Benioff's vision and expanding marketing that might forgive a lot of operational sins.
But as the initial enthusiasm for Salesforce.com's IPO continues to wear off as the fog surrounding the company's real challenges dissipates, customers and investors alike are going to want real clarity about the company's prospects, as opposed to the soupy mix of articles of faith and anecdotal customer references that Benioff routinely cites today.
To his credit, Benioff is a first-class guerilla marketer that, for a time, can talk his way past a lot of issues. But as the market and the company mature, people are going want to see a lot more operational substance than marketing flash if he hopes to make Salesforce.com a real phenomenon, rather than a noteworthy footnote on the path to a much larger utility-computing trend that will ultimately be dominated by others.