As Google dabbles with selling access to its software online (seems a pretty good deal at $50 a year), it’s probably a good time to take a closer look at the economics of this business, as exhibitied by acknowledged leader Salesforce.com.

There’s no question that Marc Benioff’s software-as-a-service outfit has hit on a formula that appeals to customers. In fact, it just reported the addition of 90,000 new subscribers last quarter, taking the total to 646,000.

Take a closer look at the business model, though, and this still feels like "case unproven." Like any other business that depends on subscribers, there are a handful of measures that really count: how much does it cost to attract new subscribers, how much do these subscribers pay each month, and how long do they remain customers? In the language of mobile telephone or cable TV companies, you have to watch customer acquisition costs, ARPU (average revenue per user) and churn.

At Salesforce.com, some of these indicators are showing signs of stress. Sales and marketing costs are heading up: they just topped 50 per cent of revenue. Meanwhile, ARPU is coming down (it slipped by a couple of dollars in the latest quarter.) Churn is not a number that is readily apparent from the latest quarterly numbers, though Mr Benioff has said in the past that this remains minimal by the standards of most other subscriber-based businesses.

With competition from Oracle and SAP picking up, all of these measures will bear close scrutiny in future. Over the last two quarters, operating costs have been growing faster than revenues for the first time, according to David Hilal at Friedman Billings Ramsey. There’s also the fact that, after deducting employee option-related costs, Salesforce.com doesn’t yet make a profit.

This doesn’t mean that the model is broken: Mr Benioff’s dash for growth may eventually pay off handsomely. But it seems far too early to declare him the victor in the software-as-a-service game.

February 22nd, 2007 in Uncategorised | Permalink