Words of wisdom

Posted: May 13, 2009 in CRM
Tags: , , ,

“If you can’t make money at it, you don’t have a business, you’ve got a hobby.”

Words of wisdom from my dad.

I was surprised by the mini-storm that blew up over Salesforce’s apparent decision to charge ISVs, SIs and other forms of developers for support using their development environment.  Two primary arguments have cropped up, one that support ought to be free and the other that it’s hard to make money if you can’t charge 22% for service.

OK, let’s tease these things apart.  Free support is a good and noble idea and it is encompassed in the basic premise of on-demand or cloud computing or SaaS or whatever you choose to call it.  Subscribe to the application service and you have the right to call in as many times as you want to ask dumb and not-so dumb questions.  In Salesforce’s case, they won’t tell you how to sell but they will help you untangle the differences between leads, contacts and opportunities.  Then they will probably direct you to some of their basic level training.  That’s only fair.

Salesforce, as we all know, also has this on-demand development environment and with it you can build any number of database applications and reports or integrate with whatever else there is in the universe.  At that level, you are playing with the innards and you are dealing with an application that the vendor — i.e. Salesforce — has no control over.  It’s like me putting a turbo on my Honda.  I am free to do that but, understandably, my dealer won’t be happy to see me and all warranties on the power train would, I am sure, be toast.  From then on, if I need to get anything fixed I will probably become a regular caller at Tom and Ray’s NPR show, “Car Talk”.

It seems to me that charging for support when people are using the development environment to make new applications or even new functionality is like putting the turbo on my Honda and it is fair (though I might quibble with the pricing structure).  Supporting smart people building applications in this new environment requires smart people, gear and real estate on the other side.  That has to be paid for.

Now, as far as pricing is concerned, I do believe they (Salesforce) need more than pricing for levels of service and response time.  They also need to build out a matrix for small, medium and big developer customers.  That’s only fair given that the more developers you have the more support you’ll need.  Spare me the argument that your developers are smarter than mine.  Sheesh!

Finally, my friend Barney Beal wrote recently that “Oracle CEO Larry Ellison and many an SAP executive have long maintained that the SaaS business model can be very difficult to turn a profit with. One would imagine it’s especially difficult if you can’t charge those maintenance fees of 22% of net licensing…”

That’s true as far as it goes but keep in mind that even though Salesforce is now a successful CRM provider, making a few bucks, the company is a neophyte in the application tools business.  It gets confusing because it’s all one company but if Salesforce CRM was a distinct entity from Salesforce the tools and hosting company, I think most people would not expect the nascent company to be profitable.  In company and category building eras, few companies make money though many are cash flow positive.  Oracle and SAP didn’t make a ton of money when they were new either.

Last point, it’s especially hard for conventional software companies to make a profit in on-demand but there are different reasons for that which include fundamentally different business paradigms.  Conventional companies are bloated compared with the on-demand companies that I have seen.  Their structural costs are higher.  I find the whole idea that on-demand companies can’t be profitable to be nothing more than the wrong paradigms are being applied.

So all of this brings be back to dear old dad — you have to make a profit.  I don’t have a problem with what Salesforce is doing as long as there is adequate value being exchanged.  Of course I am just an analyst in all this.  No customer likes a price increase or the imposition of a fee when something had been free and some feathers may need to be smoothed here.  Because the other thing you need to have to call yourself a business and not just a hobby is happy customers.

So, what did you think?

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