Benioff: Time's right for on-demand software

Enter Marc Benioff. As CEO of Salesforce.com he brings an almost evangelical zeal to transforming how customers use and pay for CRM, the technology enterprises deploy to manage and automate sales, marketing and customer service. His idea, conceived in the late 1990s, was to enable companies to buy CRM services much like they buy electricity or water, paying for it in monthly installments per user rather than shelling out hefty up-front license fees. Salesforce would manage the software on its own servers and shower attention on customers.

The concept, variously referred to as on-demand, utility or hosted computing, launched Salesforce as a CRM powerhouse and challenged the pre-eminence of industry leader Siebel Systems. More broadly, the company's innovations, capitalizing on the disruptive power of the Internet, helped validate the idea of on-demand software.

Before starting Salesforce in 1999, Benioff spent 13 years at Oracle and also worked at Apple Computer, along with founding another software start-up. His big moment at Salesforce came in June 2004 when the company went public and its shares soared more than 56 percent. One year later the company, whose market capitalization tops $2.4 billion, has roughly 15,500 customers, including giants such as Gateway, Nokia and Merrill Lynch.

Benioff recently spoke to TheDeal.com's Tech Confidential about Salesforce and the emerging CRM terrain.

Tech Confidential: Why should companies adopt on-demand CRM, rather than licensing traditional packaged software?
Benioff: Because traditional software has let a lot of companies down. They bought it and never got it running. No value was derived from it. Then it was hard to upgrade, to update it and change it. Your changes could not move forward in a new version. So from a technology, business and usage model, it didn't really work, especially in the CRM market.

Still, don't users of hosted software lose a measure of control over their technology given that Salesforce is managing it for them?
Benioff: That's exactly right. We don't want our customers managing the software. We don't want them managing the hardware. That's what we do for a living. So in the same way that you outsource your payroll to (Automatic Data Processing) or you outsource power consumption to the power company, it's the same thing with us. We're just much better at doing this than even our customers are.

Look at a company like Merrill Lynch, which recently signed a big deal with us. They had already bought traditional CRM software. ADP had already bought it. SunTrust (Banks) had already bought it. It failed for them. So we're going on ground that has already been torched before by competitors.

Once upon a time it was common for corporate customers to buy niche software products from multiple vendors. Now companies increasingly want a suite of applications from a single vendor. How does Salesforce, which is firmly focused on CRM, plan to adapt to that trend?
Benioff: We are not just a CRM provider. We provide two killer applications--Salesforce and Supportforce--as a service. We provide Customforce, which is our tool for building new applications, and we provide our on-demand database and integration platform, Sforce. We also provide our on-demand operating system, Multiforce.

And that is the suite that our customers want. They want a CRM suite. And they want an application development and deployment suite, but delivered as a service. Customers are not asking us for the fully integrated total solution.

Only about 30 percent of your revenue comes from large enterprises, with the bulk coming from small and midsize customers. Does that need to change for Salesforce to remain competitive?
Benioff: Look at our last quarter. We had 84 percent revenue growth. We're seeing tremendous growth in the small enterprises and the medium and in the large markets. Just look at the past year--how many did we sign? It's been fairly incredible the number of new large customers that we've added, whether it's Staples, or DuPont or Kaiser (Permanente).

If you compare that to some of our competitors, like Siebel, they've had disastrous results and haven't signed anybody new. In our last quarter we added 1,600 new customers.

Unlike Salesforce, which lets companies customize your software according to their needs, Siebel offers on-demand CRM targeting vertical industries.
Benioff: Yeah, it's been a disaster for them. Terrible. Horrific. The worst ever.

Still, why isn't it a good idea to tailor applications to an industry's needs?
Benioff: Your industry is a good example. Why is it we run CRM for the Dow Jones Newswires and The Wall Street Journal? Why do we run (America Online), Sports Illustrated, The Washington Post, the Tribune Company? Why do we have such a strong presence in media? Because it's very hard to build a media vertical. Each of their tabs are different, their page layouts are different. Even in financial services, which is one of the Siebel verticals--the ominous verticals--did Siebel win the Merrill Lynch deal? No. Why? Because Merrill Lynch wants to customize their CRM exactly for themselves.

What makes you so convinced that Siebel's approach is wrong and yours is right?
Benioff: Did you see Siebel's numbers last quarter? They announced they have 32,000 (on-demand) subscribers. That's the total after two or three years that they've been in our business. We added 40,000 subscribers in the last 90 days, more than they've added in their entire history in our business, because their strategy is terrible.

Customers don't want to be put in the little Siebel box and be told, "This is your vertical." For the first four years we were in business, we didn't allow our customers to customize, we didn't have a tool. Now we do, and they love it. And the key is that when we upgrade and update, they don't lose the customization. If people wanted verticals they'd be buying Siebel, but they've never announced a single large vertical deal. That's amazing, which is why in their last fiscal quarter their license revenue was lower than in any quarter since 1997.

What do you tell customers who don't want the hassle of customizing their own applications?
Benioff: Don't choose us, because we found that the key to adoption is customization. The key to getting the users to really use the product is customization. We have found that just delivering something out of the box--which is great, and we do that--is not enough. Everybody wants to make a change. Since we started customization technology a year ago, customers have made over 7 million customizations on our service.

According to industry research, more than a third of Salesforce's customers are open to switching to different software. Are you concerned that companies view Salesforce as a commodity product?
Benioff: In many ways Salesforce is a commodity product. We eliminate the risk of customers getting stuck. We've created a platform that gives them the ability to switch if they want to. It's a market without risk. They can choose us, and if it doesn't work out they can choose someone else later.

Sources say that your company's customer renewal rates are possibly the worst in the CRM business, and yet you spend a significant portion of your budget on sales and marketing.
Benioff: They couldn't know because we don't disclose them. We don't talk about our renewal rates.

OK, but the perception is that Salesforce has trouble retaining customers.
Benioff: I don't think that's the perception. Which large customer have we lost lately? Which midsize customer or small customer? We feel very good about what those numbers are, but that's not something we disclose.

Another common industry notion is that Salesforce rarely discounts its offerings, choosing instead to focus on customer satisfaction. If that's true, how will you stay competitive if your rivals decide to slash prices?
Benioff: If you're going to buy a car, there's not just one car manufacturer. Or if you're going to go buy a TV, there's not just one TV manufacturer. In big markets you have competitive situations. Competitors will compete with different types of tactics, depending on what market they're in and their position in that market. Toyota does not have to discount the Prius because everybody knows it's the best hybrid. It's the lowest cost, it's the best value, it's the best technology.

How must Salesforce improve?
Benioff: We're constantly evaluating our product. And where we find gaps we're adding new functionality.

An example is that customers really wanted to build and run multiple on-demand applications. That was a major deficiency for us. We could run one app, but not multiple apps. So now we have Multiforce because the customers demanded that. We're the only company that has an on-demand operating system, and I think that will be a key differentiator going forward in the market.

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