Hosting Rules: More Vendors Embrace Model

Salesforce.com Inc.'s success at selling hosted sales and customer-service software continues to change the way other vendors offer their own CRM products. When a new version of Microsoft's CRM software arrives early next year, businesses will be able to pay for it by the month instead of purchasing perpetual licenses for employees.

Microsoft last week began testing the new version with several hundred computer resellers and independent software vendors. Version 3.0's subscription-pricing option will let resellers host the software and set pricing. Microsoft faces a challenge against such an established competitor. "They have to come in under Salesforce's pricing," says Sheryl Kingstone, an analyst at market-research company the Yankee Group. Salesforce lists at $125 per user per month for the software's professional edition but can drop into the $70 to $80 range for large deals.

Technical fixes are in order, too. Microsoft introduced version 1 of its CRM product 2-1/2 years ago, but Kingstone says customers complained about subpar integration with the company's Outlook E-mail and calendar software and other performance problems. Microsoft skipped version 2 to pack more features into its new release.

Salesforce's rapid growth isn't going unnoticed by others, either. Earlier this spring, SAP demonstrated a browser-based version of its CRM application at a conference in Denmark, a possible precursor to selling a subscription CRM service. Siebel Systems Inc. also has been rapidly updating its hosted CRM offering as new CEO George Shaheen polishes the company's sagging financials. Meanwhile, Salesforce's profits increased ninefold during its first quarter ended April 30, to $4.4 million.

In May, Salesforce inked a 5,000-seat deal with Merrill Lynch. Last month, it released an upgrade to its CRM product, which it says is used by about 15,500 customers. There's more behind the success of business models like Salesforce's than companies wanting to save money on software licenses, Kingstone says: "You're also selling to business managers who want to avoid an IT project."