October 2005

The Customer Is Sometimes Wrong

Continued from page 1

By Wade Roush

Drawing a Line
Marc Benioff left Oracle in 1999 to start a company that would sell CRM services over the Web. Why CRM? "It's one of the best beachheads for on-demand software, because it's especially amenable to the hosted model," says Clarence So, who joined Benioff six months after the founding of the company and is now the company's vice president and general manager of community, overseeing relationships between Salesforce's customers and its partner software development companies. "Salespeople are all over the place," So points out, and it makes everyone's lives easier if all they need to do to report their results and get their next assignments is find an Internet connection, open a browser, and log on to Salesforce.com.

But that logic wasn't immediately apparent to prospective investors, whom it was So's first job, from 1999 to 2001, to lure. "People were saying, 'This stuff will never fly. Companies will never let anyone host their data.' The word 'control' came up a lot." According to So, the investors told Benioff to build both a self-contained CRM package and a hosted version, believing that the hosted version would attract customers but that these customers would eventually want to bring the software in-house..

The pressure to follow this advice was great. "In 2000 and 2001, every VC was going to their portfolio companies and forcing them to adopt a technology model that said, 'Give customers choice. If your customers want you to host the software, do that, but if they want to bring it in-house, let them do that,'" says Tien Tzuo, Salesforce.com's senior vice president of product management. "A lot of startup businesses built technology models to accommodate this choice."

Benioff and his small staff -- mostly working out of Benioff's home -- considered it a bad idea to grant customers the in-house option. So they did the unthinkable: they walked away from the prospective investors who insisted on the "choice" model. "We've taken plenty of big bets, and the bet we took in 1999 was that we were not going to play that game," says So. "We were going to go whole hog into the hosted model. Marc felt that the control issue was just an emotional issue, not really a rational issue."

It was Benioff's long-standing belief in the rationality of the hosted-software model that made him unwilling to compromise. In 1999, before he had his first customer, he had determined that the only way to make his service more attractive than competing CRM systems was to host all of his customers' data in one place, which would simplify maintenance and upgrades.

Salesforce's low prices, which haven't changed since 2000, may have helped some customers get past their control worries. For small businesses (having five or fewer employees), Salesforce charges only $995 per year. Medium-sized businesses pay $65 per user per month, and big corporations pay $125 per user per month. Running traditional enterprise CRM software can cost a company twice as much, once the costs of hardware, IT staffing, and the like are factored in over the five-year lifetime of a typical software package, according to a study by the Yankee Group, a technology consultancy in Boston.

ClearCube's controller Dresser eagerly testifies to the savings Salesforce's hosted service brought his company. "The total cost of ownership is much lower than the traditional CRM software," Dresser says. "Also, we're not dependent on our IT department to fix stuff anymore, we didn't have to put in a huge effort up front, and upgrades take place instantaneously without affecting our custom modules."

Indeed, Dresser attributes part of his own company's international expansion, growing revenue, and increasing profit margins (its 2004 fiscal year revenues tripled over 2003 and its profit margin more than doubled) to Salesforce. "There is no way we could have managed our growth into the four corners of the world without an integrated CRM," says Dresser.