Its the business model,stupid!

From someone who knows the enterprise software business well, I recently heard scepticism about the value that salesforce.com was creating for their customers. After all, SFDC offers pretty basic functionality for the most part. They go fairly broad, but not deep. Their various modules appear to have more of a toy-like feel when compared to the sort of functionality that old guard enterprise vendors like Oracle, SAP and Siebel build into their business applications. We've heard Gartner say that before in their note 'Complex Salesforce.com Deployments Will Cost You' . And as I've noted on this blog before, I agree with Gartner's argument here. There's limited inbuilt functional value here from a typical large enteprise perspective.

So why should investors pay 10X rev/100X earnings for SFDC's commoditized value? Over 20X for Google!..Why indeed? Because its the business model, stupid! Its their growth potential being factored into the multiples here, no relation (inverse, if at all) with the absolute selling price of their products (a metric held very dear in the enterprise software world). Think of this like the paradigm shift from mainframes to PC's in terms of the market expansion these companies are driving.

A business that focuses on promoting mass usage i.e. commoditization, particularly one that's innovating towards that goal, is really more about building barriers for new entrants through scale and volume. Its about production and service delivery capacity that scales up without degrading, and a selling operation that scales as well. Its not so much about value per sale, as much as it is about addressing new underserved markets by dramatically reducing the cost of serving a customer.

SFDC is adding 10-15K users a month, at a steady clip so far, small business by small business. For good measure, there's an emerging trend of larger businesses getting drawn towards it as well. I don't see how/why this growth among SMB's will change soon, if their execution stays the way it has been so far. Sure, this is not a model with network-like effects and exponential growth, and that makes for some conservatism. But its built for long term linear growth, and more importantly, its game changing in nature.

There are millions more users of the kind they have so far (~350K). For a lot of them and the businesses they work for, $1000 a year is a pretty good deal for what SFDC allows them to do, its robustness and simplicity, its transparency, and the hassle it takes away.

And note all the ingredients - Visionary leadership. Business model innovation. Scalable architecture. Broad, horizontal, low cost/high volume positioning. Emerging platform-like characteristics and a nascent developer community. Self-serve provisioning. Product globalization. International sales operations. Aggressive infrastructure investments. Appealing branding and marketing. Presence in both underserved developed markets and high potential emerging markets. Finally now, a partner distribution model with exciting potential (AppExchange)...

Yes, there's value here. Its in the model's scalability, and its ability to serve a large underserved market.


(Disclaimer: I own stock in salesforce.com)