Why Salesforce.com Has Passed Its Prime
Why Salesforce.com Has Passed Its Prime
It’s an age old story — the upstart rebels against the parent, gets successful, and ultimately becomes the very thing against which it used to rail — its parent. That’s the story arc of Salesforce.com CRM +4.41%
which was founded by an Oracle ORCL +2.78%
sales guy who set out to fix the ills of expensive, inflexible corporate software and is now becoming the very thing that it battled. Salesforce.com declined to address these concerns directly. According to a Salesforce spokesperson, ”Many companies are now participating in the cloud economy that Salesforce pioneered over 15 years ago. With more than 150,000 customers of all sizes worldwide and more than $4 billion in revenue last year, Salesforce continues to deliver customer success.” Salesforce.com got its start in 1999. Marc Benioff
, the customer relationship management (CRM) software as a service (SaaS) provider’s CEO, spent 13 years at Oracle where he became the youngest vice president in its history at age 26. In 2004, he left to start San Francisco-based Salesforce.com with the revolutionary idea of getting rid of software — turning it into a service that would be delivered over what has come to be known as the cloud. SaaS’s advantages to customers were considerable. Customers would pay a relatively low upfront fee, the software would be easy to get up and running — eliminating the need to pay $3 in consulting fees for every $1 they paid for the software license. And they could get the latest versions regularly without having to go through painful upgrades. SaaS threatened to take customers from companies like Oracle that sold software. Yet Oracle CEO, Larry Ellison
invested $2 million in Salesforce.com and sat on its board until Benioff concluded that it would not be good to be giving Ellison detailed information about the company after Ellison decided to back NetSuite
— a direct competitor to Salesforce – founded by two former Oracle people — Evan Goldberg and Zach Nelson
. Salesforce.com went public in July 2004 at $3.96 a share. By February 6, 2015 it was trading at $59.17 a share — yielding a market capitalization of $36.8 billion — up at a 29.3% annual rate since the IPO. While losing $232 million, Salesforce.com generated sales of $4.1 billion in the last 12 months
. Sales in its 2014 fiscal year rose 33.5%. But trouble lurks on the horizon because rivals are exploiting customer frustration with Salesforce.com’s high prices.
That’s the claim of Daniel Stevenson, a veteran of several cloud-services companies, who explained in a February 6 interview that “Salesforce.com offers a 250 user company a “Professional” Sales Cloud package for $65 a month. [If that company] wants to connect with a data source or a marketing automation system it has to move everyone up to the $125/month “Enterprise” edition costing $18,000 more a year.”
It does not look like Salesforce.com faces immediate peril but here are five causes for concern.
1. NetSuite is taking customers
Here are two cases of companies switching to NetSuite from Salesforce.com.
BankServe — a San Francisco-based electronic payment software company — switched to NetSuite from Salesforce.com to save money. Don Suva, BankServe’s Corporate Controller
, said, “In the past we had used both Salesforce.com and Great Plains, but our sales reps and our financial team preferred one product for everything. We have saved about $25,000 in costs alone.”
NetSuite also let BankServe “enter a sales order and generate an invoice from anywhere. That’s something we couldn’t do with Salesforce.com,” according to Suva.
was also frustrated with Salesforce.com. As its president, Carmen Gernhart explained, “With Salesforce.com there was no way to turn a lead into a customer. We didn’t want to wait for Salesforce.com’s future promise of integration – we wanted it now.”
2. Significant competition from upstarts
When it comes to small business, there is plenty of competition for Salesforce.com from upstarts. And one place where that rivalry is particularly pronounced is in pricing — Salesforce.com charges as much as 18 times more per-user than some of its smaller competitors.
Here are some examples from FitSmallBusiness
- Salesforce.com Enterprise Edition: $125/user/month
- Zoho: $2o/user/month
- Nimble: $15/user/month
- Insightly: $7/user/month
FitSmallBusiness analyzed 30 vendors and picked Insightly. It wrote, “We recommend Insightly because it’s flexible, easy to use, and meets the needs of most small businesses. At $7 per month per user, it’s also one of the least expensive CRMs.”
Stevenson argues that this “lower end of the CRM market, is where most of the growth is taking place.”
3. Spending too much on marketing
Salesforce.com seems to get less growth out of more marketing expense than rivals such as Workday.
How so? In its September 2014-ending quarter, Salesforce.com revenue grew 28.3% while spending 51.3% of revenue on sales and marketing. Workday did better — growing 68% while spending a relatively small 37.5% of revenues on sales and marketing.
Stevenson thinks this difference can be explained in part by their differing marketing strategies. As he said, “Salesforce.com’s high sales and marketing costs come from its decision to only sell through its own direct sales team to big and small enterprises. Other SaaS companies are more efficient at attracting new customers. Workday, for example, focuses on selling solely to larger customers and thus spends less to acquire a dollar of annual contract value.”
4. Rigid model that needs to adapt to social selling
Social media have changed the way sales people sell. With “social selling,” sales people use LinkedIn, Facebook, Google + and other networks to interact with prospective customers, make them aware of their product, and encourage them to buy.
By contrast, Salesforce.com was designed with a more traditional selling model in mind. Explained Stevenson, ”As a database application, Salesforce.com is built around a more traditional sales model (Suspects –> Leads –> Prospects –> Opportunities –> Customers). Newer CRM applications are better adapted to social selling.”
While Salesforce.com will continue to adapt its service, it was not built to support “social selling.”
5. High stock market valuation
Salesforce.com is losing money based on GAAP accounting so there is no meaningful Price/Earnings ratio for the stock.
But on a Price/Sales basis, Salesforce.com seems outrageously over-valued. At 7.2, Salesforce.com’s price/sales ratio is much higher than the industry average of 4.8, according to Morningstar
These five concerns make me want to steer clear of investing in Salesforce.com.