Salesforce.com Reconsiders Referral Fees As Partners Push Back

AppExchange leader's departure

In February, Salesforce.com introduced a voluntary "AppStore" referral program calling for AppExchange participants to kick back 10 percent fees on first-year revenue from all closed sales originating with AppExchange or other Salesforce.com marketing activities. The fee discomfited partners used to the usual channel economics, where vendors pay them margins, not the other way around.

"I appreciate that it's inventive, but as an ISV, I'm simply not used to that approach," said one AppExchange participant.

Salesforce.com, based in San Francisco, is planning to soon ratchet up the squeeze. Its AppStore road map calls for it to introduce a new "premium referral" tier in its third fiscal quarter, which begins in August. In return for additional demand-generation campaigns and more face-time with Salesforce.com's direct sales staff, the company wants participants to pay it 25 percent fees on the first-year value of closed deals.

While Salesforce hasn't yet started pushing "premium referral," the new fee looms at a time when partners are already on edge about the company's efforts to extract money directly from its partners' pockets. Cowen and Company analyst Peter Goldmacher put a spotlight on the issue in a research note sent out to clients last week, in which he warned that Salesforce.com's efforts to monetize AppExchange could curb partner participation.

"While all of the partners we spoke to were complimentary of the technical merits of AppEx, virtually all of them are unhappy about the fees they have to pay for leads they get from [Salesforce.com]," Goldmacher wrote. "ISV dissatisfaction at this pivotal point in the development of the platform could hinder early stage adoption critical to longer term growth. With other platform alternatives out there from Oracle, Microsoft and WebEx Connect, we are concerned that [Salesforce.com] is potentially squandering a significant opportunity to partner with the wide variety of vendors necessary to generate momentum for AppEx. If AppEx fails, an important growth driver will disappear."

In a random polling by CRN of 20 AppExchange participants, the majority of those who responded said Goldmacher's note had the ring of truth to it.
NEXT: Is It Worth It?"I think it's a fair assessment," said one. "It just doesn't appear that there was a great deal of flexibility in the way Salesforce.com approached this."

However, no partners said they would walk away from Salesforce.com because of the fees -- yet. The bind ISVs are caught in is that Salesforce.com is, as one said, a "force of nature." With more than 30,000 customers and almost 650,000 paying subscribers (as of Jan. 31), the company controls a large pipeline of SaaS-savvy customers that ISVs covet.

For some, that makes Salesforce.com's unorthodox fees worth paying.

"Reality is that Salesforce.com is the hottest ticket in town, evidenced by the fact there are so many partner apps on the AppExchange. I can see where partners could argue that the fees are a little high...[but] 10 percent of a deal that I wouldn't have otherwise closed is a 10 percent gladly paid," said Andrew O'Driscoll, founder and CEO of AppExchange participant Apprivo, in San Francisco.

On-demand document management application maker ShareMethods has landed three-quarters of its customers through AppExchange, Salesforce.com's annual Dreamforce conference, and other activities in conjunction with the vendor, according to CEO Eric Hoffert. ShareMethods' ShareNow library for marketing materials was one of AppExchange's pioneer applications, and in May ShareMethods posted a second product, ShareOffice.

"We see the 10 percent as a reasonable fee to pay given the value that we perceive," Hoffert said. At last year's Dreamforce, ShareMethods landed its second-largest customer, a deal that on its own paid for the company's investment in Dreamforce.

But like other partners, Hoffert is hesitant to commit to paying even more. Salesforce.com has sharply hiked its Dreamforce fees this year, with participation costs starting at about $20,000, according to partners. The coming premium partner tier is likely to up the pressure on partners to dig deeper into their pockets, and at the end of the year, Salesforce.com plans to add checkout functionality to AppExchange, enabling it to handle billing and collection for purchases of partner's applications. That service will carry an additional 20 percent fee -- meaning partners who sign on for the all-inclusive Salesforce.com partner package will face 45 percent fees.

"The 10% fee we're comfortable with. The other fees, it's an open question," Hoffert said. "We have to get more details. With the AppStore checkout, there's a significant fee for that capability. We'll have to take a really, really careful look at it."

Salesforce.com is feeling the pushback from partners about its AppExchange monetization schemes. The 10 percent referral plan remains voluntary -- although partners say the pressure to sign is intense -- and Salesforce.com hasn't disclosed how many of AppExchange's 250 or so participating ISVs have agreed to pay it. On Salesforce.com's May earnings call, CEO Marc Benioff told analysts that more than 100 partners had "signed up to be part of the AppStore referral agreement," but company executives couldn't confirm that all of those 100-plus partners were paying the 10 percent fee. One partner's impression was that no more than a handful of companies had signed contracts agreeing to it.

In light of partners' qualms, Salesforce.com is considering adjustments, according to Bruce Francis, vice president of corporate strategy.

"As we've been talking to our community of partners, one thing they've said loud and clear to us is 'we'd like to have alternatives to this.' So that's what we're doing right now -- we're coming up with alternatives," Francis said.

What form those alternatives will take is still being decided, but a pay-per-lead model is one scenario under consideration. Francis said Salesforce.com will have more details to offer in a few weeks, before it launches its premium referral program.

"We consider this a dialogue with partners," he said.

While partners hope Salesforce.com scales back its steep fees, they sound resigned to the company's efforts to nickel-and-dime them. When Salesforce.com first opened the AppExchange in late 2005 -- one year before it unveiled the referral-fees plan -- everyone knew it was only a matter of time before the company began attaching fees to it, participants say.

"We kept asking them 'how are you going to monetize this?'" recalls one partner. "Salesforce.com is famous for monetizing everything. Literally, everything. It was clear something was going to happen."

Still, partners overwhelmingly say Salesforce.com's marketing juggernaut is worth paying to hitch a lift on. One partner who was irked to find that a five-figure AppExchange "certification" fee (separate from the exchange's referral fees) will be assessed annually, instead of only once as he'd initially believed, still called the Salesforce.com relationship the most successful partnership his company has ever done.

"Generally speaking, our experience with Salesforce.com has been positive. The AppExchange model has worked for us," said another partner. "But there is a lot of selling that goes on to partners. It's pretty intense. I think Salesforce.com needs to strike a bit more of a balance, where a partner doesn't feel so much like a customer."