Salesforce.com Profitability Sparks Renewed Debate About SaaS Sustainability


Posted on August 28th, by thinkstrategies in Uncategorized. Comments Off on Salesforce.com Profitability Sparks Renewed Debate About SaaS Sustainability

Salesforce.com Profitability Sparks Renewed Debate About SaaS Sustainability

Despite the accelerating growth of Software-as-a-Service (SaaS) and growing interest in all things Cloud, skeptics are still seeing dark shadows which they think indicate fundamental flaws in the long-term prospects of on-demand services.

The most recent example was the controversy created by Salesforce.com’s most recent quarterly financial results. While the company’s revenues grew 34% and deferred revenues increased 43% on a year-over-year basis, the company still reported a second quarter (Q2) GAAP net loss per share of $0.07.

Although I tend to look at the world through ‘Cloud-colored’ glasses, I don’t think I’m being naive because I see these numbers as a outgrowth of a prudent strategic decision by Salesforce.com’s management to aggressively invest in winning a greater share of the high growth SaaS/Cloud market. In fact, Marc Benioff made the same point during a recent interview on Jim Cramer’s “Mad Money” show.

Like Benioff, SuccessFactors’ CEO/Founder Lars Dalgaard used to reject concerns about short-term profitability and boast that his company could manage its costs and even generate impressive margins at will if necessary before being acquired by SAP for $3.4 billion. Obviously, SuccessFactors’ operating margins didn’t concern SAP long-term. Nor have profitability fears stopped Oracle from buying RightNow, Taleo and many other SaaS/Cloud vendors.

If Saas/Cloud offerings are fundamentally unprofitable, why are these legacy vendors  and others quickly gobbling up leading SaaS/Cloud players in this market?

The legacy vendors are not only succumbing to the escalating demands of their customers for SaaS/Cloud solutions, they are also salivating over the prospects of creating more predictable revenue streams via these subscription services. The most recent example of this trend is IBM’s decision this week to acquire Kenexa.

The truth is that we are still at the ‘land-grab’ stage of the Cloud Rush and the leading players are aggressively buying share in hopes of securing long-term profitability.

The second part of this strategy is expanding the SaaS/Cloud portfolio to sell more services into existing accounts. Again, Salesforce.com is a prime example of this tactic as it plans to broaden its services to satisfy its customers’ sales, marketing and services needs.  Marc Benioff boasted about his company’s new set of ‘Marketing Cloud’ offerings that will be unveiled at Dreamforce next month during his “Mad Money” interview.

So, the key to success in the SaaS/Cloud market continues to be ‘Land and Expand’. Just be sure you satisfy the customer along the way!







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