The Shots Heard 'Round the World: A Turbulent Economy Is Driving Some On-Demand Vendors to Reduce Fees. Is a Price War Looming in Software-as-a-Service?

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Common wisdom in this industry tells us that CRM and related technologies are a must-have, with price a decidedly secondary concern compared to functionality. Yet when software-as-a-service (SaaS) became a viable means of delivering CRM, one of the selling points of that business model was its reduced cost versus traditional software. It was the birth of a generalization: Any SaaS will save you money.

Yet even in light of that generalization, there has been activity on the SaaS-pricing front. When Microsoft Dynamics CRM Online launched in early 2008, its monthly cost per user undercut every major player in the industry. By the end of the year, Net- Suite had announced two other major discounting initiatives, in targeted efforts to lure users of SAP R/3 and Salesforce.com. Entellium, a hybrid vendor of both installed and SaaS applications, collapsed amid falsified revenue figures--thanks in part to a bottom-dollar price structure--and finally filed for bankruptcy in early December. (See "The Rave Is Over," Insight, December 2008.)

A handful of open-source CRM providers have also started pitching SaaS users, focusing in part on price benefits. Concursive (formerly known as Centric CRM) upped the ante by offering one year of free service for up to 100 users, and promising future charges at "half of the rates of competing on-demand CRM offerings."

With the array of competitive marketing pitches on the table, not to mention the global economic nosedive, it's worth asking: Is there a price war going on in SaaS CRM?

"I think there is a good prospect of that happening," says Jeffrey Kaplan, managing director of SaaS consultancy ThinkStrategies. The success of the SaaS model has led to an increasingly crowded marketplace. Some of them are large vendors with the resources to play with price. "Companies like Microsoft will try to undercut the market; NetSuite recently tried to do that."

Jim Steele, Salesforce.com's chief customer officer and president of international operations, seems unfazed. "When I joined [this company], we were competing against Siebel [Systems], SAP, and other traditional software vendors--we were the low-cost alternative," he says. "That was back in 2001, before the Internet bubble burst, before 9/11--those events came along and changed people's outlook, like today. Customers are very sensitive to cost and value."

Even so, Salesforce.com-now one of the higher-priced SaaS vendors--seems content to let its competitors bloody each other over pricing. …