Cha-ching! Salesforce sells the value of its ecosystem

Matt Asay takes a look at the value of Salesforce and attributes its success to its community. Do you agree?



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 more

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 standard.

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.