Remember when SaaS was cheap? Just
a few short years ago, billed itself as the low-cost alternative
to expensive Siebel. Today, it’s Salesforce that increasingly looks pricey
compared to upstart competitors, according to Gartner. Is this just the natural
cycle of technology disruption, whereby David becomes Goliath? Or does it
instead speak to the importance of a vendor focusing as much on her community
as on her product?

Back when
Salesforce was cheap

Back in 2002, InformationWeek lauded Salesforce for its
“combination of low cost and easy implementation.” This, in turn, led Salesforce to claim its first ever profitable
month in February 2003. It hasn’t had many since then, given its focus on growth over profit, and despite
its ever-rising price tag.

Back in 2005, when Oracle bought CRM market leader Siebel, some
cost comparisons already found Salesforce to
exceed Siebel’s software licensing model and significantly outstrip Siebel’s
OnDemand subscription pricing. Salesforce published its own case studies, showcasing that it cost one-third of a similar Siebel deployment.

That was then, and this is now.

Today, Gartner notes that Salesforce “can be as much
as three times the subscription price versus that of the competition.” The SaaS
leader also recently introduced its Performance Edition to raise prices 25% to
35% on customers who may not actually need the additional functionality it offers,
according to Gartner.

What happened to cheaper?

In part, Salesforce simply stopped emphasizing cost as a
primary reason to buy its services. As it started highlighting at Dreamforce 2006, a full total
cost of ownership (TCO) study must also take into account all the revenue
Salesforce was enabling, and not merely the cost of its subscription.

By Dreamforce 2012, Salesforce also pitched the value of its ecosystem, which was
organized in 2005 around the AppExchange banner. Now, boasting over 2,000
applications listed — 400 of which were added in 2013 — AppExchange has become a
means of increasing Salesforce’s value, even as its price tag climbs.

Get popular, charge

Salesforce isn’t alone in this behavior. It’s natural for
challengers in a market to offer lower pricing to entice would-be buyers, then
raise or merely maintain prices later when the challengers become the
incumbents and face threats from new market entrants.

Take Red Hat, for example. In its early days, it regularly touted its cost
benefits vs. expensive UNIX and Windows. But by 2008, Red Hat had started hammering the message of
software value over software cost. By some measures, Red Hat’s pricing actually came
out higher than Microsoft’s Windows.

But cost was no longer the primary reason someone would opt for
Red Hat Enterprise Linux. The value of its ecosystem and Linux performance
carried the sale, justifying over $1 billion in revenue for a company that had
a ready-made replacement in RHEL clone CentOS. With thousands of certified
applications, RHEL became much more than Linux: it became an application

Paying the price for ecosystem

In such markets, ecosystems justify premium pricing, even as
they protect vendors from competition. Apple has shed much of its
market share to Android, but it continues to print money because of the app ecosystem
built up around the iOS App Store.

For developers looking to build a sustainable open source, SaaS, or other type of business, the trick is to spend as much time building one’s
community as one spends on the product itself. Because that community — that
ecosystem — is ultimately the thing that makes a product so valuable to
prospective customers and makes them willing to pay a premium.

How important is community to your organization? Share your experience in the discussion thread below.