R&D cost advantage of salesforce.com's on-demand model

This post was authored in Feb 2005
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There's an inherent cost and competitive advantage in an ASP business model such as salesforce.com (SFDC), and it gets less attention than it should. Its the efficiency of their software development and delivery process as compared to the process in a traditional license based software product development firm. That makes a newcomer like salesforce.com an even more potent competitive threat to incumbent vendors in the enterprise software space. Salesforce.com is simply able to add more functionality cheaper and faster because of the advantage their business model lends to their software process.

I notice this every few months, when I sign up for one of SFDC's trial accounts to get a quick status check on their functionality. Usually I'm pleasantly surprised with what I find in terms of functionality they've added. They're on their way to being not just a sales or CRM service, but a more complete business suite. Salesforce.com now includes modules for managing Documents, Contracts, Knowledge-base, Analytic dashboards. And as of Spring 2005, Order Management and Billing are coming soon. And as they expand the scope of what they offer, some of their earlier functionality in the Sales (SFA) area is now getting pretty mature after several rounds of releases. And increasing penetration among larger companies underscores the evolving maturity of their offering.

So what makes their software process efficient?...Basically, they need to produce, maintain and support just one version of their software, running on just one instance. No back porting and forward porting of fixes to multiple installed releases. No need to port to various operating systems. No need to be compatible with various databases. No need to produce a major release every 12-18 months to pull in the license revenue. Lower support costs because of the simplicity of their offering. Salesforce R&D teams can simply keep building small and large features in a continuous flow of development, and keep adding these features in smaller releases without having to wait for a major release to go to market.

A recent earnings call had analysts asking salesforce.com why their R&D was much lower than industry benchmarks, and whether that meant they were under-investing in R&D. Some industry analysts simply don't seem to get it, but salesforce.com's management did well to point out that its because of their particular business model.