Economic Woes May Lower SaaS Prices

The ongoing global economic crisis may spark a pricing war in the SaaS (software as a service) arena, according to a major vendor in the space.

During an appearance at an investor conference in New York this week, Salesforce.com Chief Financial Officer Graham Smith discussed the company's readiness to lower prices in order to remain competitive.

"It won't surprise me if going forward in these times that we see much more aggressive pricing. That's sort of typical," said Smith, who also addressed investors in London on Friday. "We are able to match pricing."

Smith indicated that Salesforce.com, known for its CRM (customer relationship management) software, is not about to run a closeout sale, however.

"My view is you have to sometimes be aggressive but equally, if you've got a small company that's being insanely aggressive on pricing, if I was a customer I'd be kind of nervous about that -- it speaks to their business situation," he said.

SaaS vendors typically cite a handful of purported advantages -- such as no need to buy and maintain new hardware, faster deployment and easier upgrades. Therefore, some price cutting may be at hand, but at the same time such factors could also compel more customers to adopt SaaS, according to Forrester Research analyst Ray Wang.

Also SaaS vendors may not be compelled to cut prices as much as companies that sell traditional licenses, said another Forrester analyst, Andrew Bartels.

That's because SaaS companies sell subscriptions, getting their money on an ongoing basis, and aren't necessarily scrambling as desperately to meet growth targets as a quarter ends, Bartels said. Meanwhile, it is common for major vendors to discount list prices for on-premise licenses by 50 percent.

But another observer believes Smith's prediction will be borne out in the market.

"We were already predicting something of a battle on pricing given how aggressive Microsoft is being around Dynamics CRM Online. I guess the economic doom and gloom just lifts that," said 451 Group analyst China Martens. "It's also a way for Salesforce to appeal to its smaller customers and retain them. I've yet to hear the same price-cutting story from other SaaS players name-checking the economy, but it's sure to come."

Beyond the world's economic woes, SaaS has now reached a certain level of maturity, and customers have had time to measure costs and their return on investment compared to on-premises software deployments, Martens said.

"There's also a sense that SaaS companies in general have been a tad opaque on pricing -- there's a base price for [sales force automation] but then customers have to pay extra for stuff like integration and other modules they might have thought would be part of the package," she added. "I'm sure customers are turning around to Salesforce and asking for more transparency on pricing from the get-go."

Meanwhile, other on-demand vendors acknowledged that pricing could become an issue, but overall painted themselves as being in a sound position to weather the rocky financial times.

Intacct, which sells financial applications to midmarket customers, is "not seeing any pricing pressure at all," said Daniel Druker, senior vice president of marketing.

The sour economy is in fact driving business to Intacct, both for its lower cost compared to "dinosaur on-premises accounting systems" and the fact that companies are now looking to upgrade their financial systems for better visibility, he said.

Over in the crowded market space of enterprise social-networking platforms, one vendor sounded a similar refrain.

"For us, business is actually up, and the future looks good despite this macro environment we're in," said Timothy Young, CEO of Socialcast.

Like Druker, he claimed his software has actually become more strategic as the economy weakens.

Companies are cutting costs through measures such as layoffs and having employees work from home, and are buying collaboration software to redistribute that workload and "increase the transparency of their organization," he said.

"We definitely have room to move, and as a company we're going to stay competitive on price," Young added. "But we have not seen that as a need right now."

An executive at large data-integration vendor Informatica, which launched an on-demand division a couple of years ago, also said his company is feeling no cost pinch.

Informatica's on-demand products don't have the same features as its high-end on-premises offerings but they also cost far less, said Ron Papas, senior vice president and general manager of the division. Prospective customers have therefore been "pleasantly surprised" and cost hasn't been a major issue, according to Papas.

But he did make one prediction: "It's pretty common for SaaS customers to [sign up] for multiple years. Maybe you'll see people opt for one year [deals]."

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