Salesforce.com:

Creating a Blue Ocean in the B2B Space

05/2014-5911

This case was written by Mi Ji and Jee Eun Lee, Institute Executive Fellows at the INSEAD Blue Ocean Strategy

Institute, under the supervision of W. Chan Kim and Renée Mauborgne, Professors of Strategy at INSEAD. It is

intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of

an administrative situation.

Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at

cases.insead.edu.

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“There has been something fundamentally wrong with the technology industry for a long time. There’s been an unnecessary burden placed on customers to ensure that enterprise software delivers on the vendors’ promised results... Maybe if these software applications worked, it would be okay. The problem is, they don’t.”

“Customers don’t want to develop [applications] but they do want to make the system completely for them, make their technology fit their business and not the business fit their technology.”

Marc Benioff, Chairman and CEO, Salesforce.com

Salesforce.com, a customer relationship management (CRM) service provider, was founded in 1999 by former Oracle executive Marc Benioff with the revolutionary tagline “The End of Software”, meaning the end of traditional packaged software. Founded with just 10 employees composed of engineers, marketing and sales people and a modest investment of $2 million, Salesforce.com grew to be the world’s largest hosted CRM service provider within four years. By redefining CRM as a web-delivered solution, Saleforce.com has become an eye-catching and fast growing player in the B2B world. The company had 87,200 customers in 2010, and its revenues amounting to US$1.3 billion. In the same year it ranked 4th on Fortune’s list of “100 fastest-growing companies”.

Since its successful strategic move in the early 2000s, Salesforce.com has sustained undisputed market leadership in the on-demand CRM market for more than a decade, despite the attempts by both established enterprise software vendors such as Oracle, SAP and PeopleSoft and numerous new players to penetrate the market.

• What was unique in the strategic logic of Salesforce.com that allowed it to break away from the competition?

• How was Salesforce.com able to sustain its leadership position in the on-demand CRM market and continuously stay ahead of the pack for more than a decade?

This case will consider the above questions as it seeks to capture the industry dynamics in the past decade.

The CRM Software Industry

Customer relationship management (CRM) is a strategy solution companies use to manage their interactions with customers and sales prospects in every area of their business. CRM uses technological tools to help businesses comprehensively manage their customer-facing processes such as identifying, acquiring and retaining customers across different lines of business and via multiple channels, e.g. face-to-face, phone, fax, and email. CRM software has been developed to enable businesses to automate key functional areas such as sales, marketing and customer service and support.

Due to the booming need for database and one-to-one marketing, the CRM software market grew tremendously in the second half of the 1990s. Annual growth rate was more than 50%

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since 1996, reaching 71% in 1999. This in turn led to a surge in the number of CRM applications and vendors.

With the constant introduction of new technologies as well as shifting customer needs, the market for CRM software was highly competitive and rapidly evolving. Developing CRM software required huge expenditure on R&D and resources for system deployment, since the software needed to be integrated with other applications and databases and heavily customized to fit the needs of individual organizations. Accordingly, the CRM software market was led by major enterprise resource planning (ERP) vendors such as SAP, Oracle and PeopleSoft. Other players in the market included companies specializing in CRM like Siebel, and hundreds of smaller vendors targeting industry-specific niche segments.

Established enterprise software vendors applied the traditional business model to the CRM field, i.e. selling perpetual software licenses to be implemented in house. The software was installed, configured and customized on the premises for an individual company’s use, which demanded significant internal expertise and external professional services. CRM software also needed to be integrated with legacy systems within the client company, which could involve significant changes to work processes and infrastructure.

These traditional CRM software applications mainly targeted large businesses that had complex requirements and systems infrastructure to be integrated with the applications. They were offered sophisticated CRM software packages covering the full range of CRM fields – sales management, marketing, call centres, customer support and other CRM functions. The purchase cycle for CRM software was long. As it was often not possible to examine the software's capability “out of the box”, customers needed proof of concept before they committed to purchase. This resulted in long (more than three months) sales cycles and lengthy technology discussions among tech professionals.

The cost of purchasing packaged CRM software was high. A CRM software license for 200 users, for example, was priced at approximately $350,000. The price of the software was typically 25% to 30% of the overall cost. On top of this, customers needed to spend money on infrastructure (middleware and hardware purchases), support and maintenance, and on hiring internal or external professionals to implement and upgrade the software and train users. The total cost of owning a CRM application for 200 users could easily exceed $1.8 million in the first year alone.

Vendors normally pursued one of two strategies in the CRM software market: they either differentiated their product by adding more features, or lured customers with big discounts at the time of closing the license agreement.

Customers generally found the deployment of CRM software complex and the total cost of ownership burdensome. The increasing number and complexity of applications, operating systems, networks and computer systems made it even more difficult and time-consuming for businesses to implement and use the applications. They had to make significant investments, both upfront and on an on-going basis, in applications and IT infrastructure. They also had to employ costly IT staff and consultants to deploy, maintain and upgrade these applications and train their salespeople to use them. It often took 18 to 24 months for companies to get the application to work at full functionality. The total cost of ownership of CRM software for 200

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users over a five-year period could amount to more than $4 million, about half of which was spent on implementation and maintenance.

To make matters worse, these lengthy deployments did not always achieve the anticipated business benefits. Over 60% of CRM deployments failed to work. However, customers still had to make a purchase decision and take on excessive upfront costs and technical infrastructure changes before they could fully grasp the actual usability and productivity of the CRM solution they had chosen.

Some companies chose to buy industry-specific versions of the CRM applications in order to reduce the magnitude of customization. But implementation was still time-consuming and expensive, and the purchase and deployment process long and complex. At the lower end of the market there were numerous small businesses that simply could not afford the cost of basic CRM applications or accommodate the lengthy deployment process. These companies used alternative tools such as Excel spreadsheets or other database programs to store customer and sales information. Some even managed their contacts and sales-related documents using a Rolodex and a filing cabinet.

Salesforce.com’s Value Innovation

Challenging the conventional practice of selling software licenses and working with a network of consultants to deploy the software on-premise, Salesforce.com launched its first online sales force automation offering in 2000. Based on cloud computing, the applications were delivered via the Internet from central servers on Salesforce.com’s side, where systems were deployed and data were stored. Users gained access to the service upon signing up for its monthly (later yearly) plan. Customers would log on to use CRM applications via a simple web site and were thereby freed from the need to purchase software licenses, or to deploy and maintain the software with their own infrastructure. The cost and time associated with running and using the software dropped dramatically compared to traditional CRM software.

Salesforce.com’s web-based on-demand CRM offering radically changed the customer experience. It enabled users to access CRM applications anywhere from any device that had Internet access, be it a laptop computer, a PDA, or a wireless device, as no client software was required to be installed on user desktops. Maintenance of the applications became easier because they were centrally deployed and managed by the service provider. Salesforce.com described its new offering with the bold tagline “The End of Software”.

The price structure of Salesforce.com’s offering was simplified. Costs for acquiring CRM software licenses and maintenance were eliminated, as were the professional services fees traditionally charged for onsite deployment of CRM software. Customers simply paid a monthly subscription fee of $65 per user to access the CRM applications online.1 Companies were able to securely manage, share, and leverage their sales information over the Internet for $156,000 per year (for 200 users). The simplified deployment process and low price of Salesforce.com’s offering were appealing to small and medium-sized companies which would

1 The price of the Salesforce.com CRM service starts at $65.00 per user per month for the Professional

Edition, a scaled down version. Enterprise Edition is priced at $125.00 and Unlimited Edition is priced at $195.00.

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otherwise have been denied access to advanced CRM solutions due to lack of resources and infrastructure.

The subscription-based, on-demand CRM solution also minimized the time customers spent on lower value activities in purchasing and deploying the service, allowing them to focus on strategic activities with a greater impact on their business. Salesforce.com let its customers test the applications in a single work-group or division first, and then extend the use of the applications to other divisions once the test was successful. This gave customers greater confidence in the product at the time of purchase. As the subscription was paid on a per month basis, customers could quit virtually any time if the solution proved less than satisfactory.

Salesforce.com also simplified the features of its CRM applications. Whereas other vendors competed on features and IT functionality, Salesforce.com stripped off excessive features and focused on the essentials that catered to buyers’ core needs. Following its initial sales force automation kit, Salesforce.com focused on providing the core features of three key functional areas: sales, customer service and support, and marketing automation.

The stripped-down features allowed Salesforce.com to develop a user interface that was simple and easy to operate, making its applications more intuitive and user-friendly. The web-delivered services made it possible for Salesforce.com to collect information on web site usage patterns and improve its user interface accordingly. It could, for instance, simply move the buttons most frequently used by users to more convenient locations.

Overall, Salesforce.com freed companies from the costly acquisition and deployment of traditional CRM software, high failure rates, unacceptable risks and protracted implementation processes, and instead provided a comprehensive, flexible platform that met the basic needs of the mass of business users. Hosting and maintaining systems at the central level enabled sharing of resources and costs across a large pool of users, and thus increased economies of scale and cost-efficiency for individual customers compared to traditional on-premise CRM solutions.

Competition and Sustainability of Salesforce.com’s Blue Ocean

Strategy

Salesforce.com’s successful strategic move led to rapid growth of the on-demand CRM market. As customers of the CRM software industry were increasingly attracted to the on-demand CRM model, traditional software vendors, including industry giants like Oracle, PeopleSoft and SAP, were prompted to offer their own on-demand solutions.

To these traditional vendors, the question was how aggressively they should invest in software as a utility delivered over the web, and in a way that was compatible with their traditional licensed software offerings. Eventually, they became straddlers. On the one hand, they added on-demand solutions to their product portfolios; on the other, they denounced Salesforce.com’s offering as “immature”, implying that it did not provide the differentiated features that their traditional solutions carried. SAP, for example, launched an on-demand solution called Business By Design in 2006, which was a hybrid between on-demand and on-

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premise applications targeted at existing customers who might want an Internet-based option. However, its success in penetrating the on-demand market remains limited.

Companies like Siebel also started offering subscription services more aggressively. In 2003, Siebel purchased UpShot Corporation, the no. 2 hosted CRM provider behind Salesforce.com, and entered the on-demand CRM market with its own product, Siebel CRM OnDemand. In 2004, it marketed a hybrid approach incorporating its licensed software and the Siebel OnDemand application. With this solution a company might choose to use OnDemand for a sales division that wanted to get going quickly and didn’t need extensive integration, while choosing the packaged software for a call centre where deep integration with other enterprise software was required. With this on-demand CRM solution, Siebel extended its strategic focus to small and medium-sized businesses – a big shift as previously it had not served companies with less than $500 million of annual revenue.

But companies with hybrid solutions generally found that the business model of on-demand CRM solutions was not compatible with their existing ones. Oracle, for example, launched a hybrid solution, Oracle On Demand, after acquiring Siebel and upgrading the latter’s on-demand CRM solution. Oracle On Demand allowed customers to choose between an on-demand solution and an on-premise one. However, it eschewed the subscription-based pricing model as that would have put it at a cost disadvantage given that the company still needed to develop and maintain software for a multitude of platforms and to employ a large number of technical staff to sell the hybrid solution. Consequentially, Oracle On Demand customers had to purchase the service up front in the same way as conventional software licenses.

New entrants such as Zoho, RightNow Technologies, NetSuite, and Salesnet were more adept at copying Salesforce.com’s model. As these vendors jumped into the market to provide web-delivered subscription-based CRM solutions to small and medium-sized businesses, they attracted several thousand corporate customers.

To break away from the emerging competition, Salesforce.com again took a different strategic perspective. While other vendors urged customers to forgo custom-built programs so that they could migrate more smoothly to next-generation releases without spending huge resources, Salesforce.com encouraged customers to build custom programs according to their business needs but in a completely different way.

Toward this end, Salesforce.com launched Force.com, a cloud application development platform, and AppExchange, a web-based portal for applications trading. The Force.com platform allowed external developers to create add-on applications for almost any business need on a cloud basis and host them on Salesforce.com’s infrastructure. These new applications were packaged and distributed through AppExchange, where developers could upload applications they had built, and corporate customers could search, read reviews, test for free, and ultimately purchase and download new applications to their Salesforce.com environment. Done in this way, it took hours, not days, months, or years, to implement custom programs that were reintegrated into Salesforce.com’s original CRM offering.

Customizing CRM applications in the traditional manner required huge investments and entailed long deployment process. The Force.com platform made it possible for any developer to quickly create robust, enterprise-class solutions by giving them access to an application- development environment with all the tools and resources they needed. Freed from the need to

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buy and maintain an on-premise infrastructure, developers could create complete enterprise applications four times faster than under conventional programs and at low cost. Corporate customers could virtually run an unlimited number of applications. They could also post requests for custom applications on Force.com for developers to create applications accordingly. Through AppExchange they had access to a pool of applications for on-demand use more conveniently.

External developers serving Salesforce.com customers included many renowned companies such as IBM, Microsoft, BEA Systems, Sun, TIBCO, PricewaterhouseCoopers, and Miller Heiman. LinkedIn, for example, contributed a popular application that allowed the enriching of the sales funnel with social information supplied through LinkedIn profiles. And CVM Solutions developed a supplier-management application that ran native on the Force.com platform. In the spring of 2010, CA Technologies, a Fortune 500 software corporation, started to develop applications for the Force.com platform and distributed them via AppExchange. As of October 2010, over 900 applications from over 450 independent software vendors were available on AppExchange.

To deepen its blue ocean, Salesforce.com made a further strategic move in 2011, launching a private social network service called “Chatter”, which allowed sales people to collaborate in real time on their work items.

The effectiveness of traditional CRM solutions was often hampered by fragmentation of implementation and use in corporate environments. Individual departments tended to take isolated initiatives in implementing CRM solutions. But systems that started that way seldom got integrated later on. Lack of communication and collaboration among different departments and different users within the company compromised the productivity of CRM solutions.

Transplanting the idea of social networking to the corporate environment, Chatter allowed users to communicate and collaborate online in real time while doing their jobs. Users could send and receive information via a real-time news stream. They could follow co-workers and receive broadcast updates about project and customer status. Users could also form groups and post messages on each other's profiles to collaborate on projects. In this way, they got timely updates about what their colleagues were doing as well as the status of important projects and deals, and therefore had a full picture of what mattered most to their business. The Chatter service also created a level of “fun” by allowing co-workers to engage in social-networking activities at work, which they would otherwise do offline or via online public social networking services. Closer ties among sales team members established through Chatter in turn made collaboration easier and more productive.

Mark Benioff, chairman and CEO of Salesforce.com, remained upbeat about the future, “…Our flagship CRM product line delivers the immediacy, low cost, and low risk of on-demand applications with all the integration and customization capabilities of client/server software…We have broken through the perception of ‘leader in the ASP (application service

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provider) space’2 and are considered on our own merits as a CRM vendor, which, circling back to our satisfied and successful customer base, is where we win.”

Questions

1. Who were the noncustomers of the traditional CRM software industry? What were the biggest blocks to buyer utility in traditional CRM software offerings?

2. Which one(s) of the six paths did Salesforce.com look across to create new market space? Can you draw the value curve of Salesforce.com’s initial on-demand CRM offering in the early 2000s versus traditional CRM software vendors’ on the strategy canvas?

3. How was Salesforce.com able to sustain its market leadership in the on-demand CRM market vis-à-vis both large players and new entrants for more than a decade?

2 Application service providers are companies that offer corporate customers access to application software

and run it for them.

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Exhibit 1

The CRM vs. On-demand CRM Global Market 2004-2009 ($m)

2004 2005 2006 2007 2008e 2009e CAGR

CRM 5,144 5,458 5,801 6,166 6,576 7,016 6.40%

On-demand CRM 418 599 829 1,155 1,512 1,897 35.30%

Source: Business Insight

Exhibit 2

Market Share of Major CRM Software Vendors

Source: Gartner

0%

20%

40%

60%

80%

100%

2004 2006 2008 2010

Oracle*(avg annual growth: -6%)

Salesforce.com (avg annual growth: 29%) Amdocs (avg annual growth: 0%)

Others

SAP (avg annual growth: -4%)

* Oracle’s market share includes those of PeopleSoft & Siebel

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Exhibit 3

Salesforce.com’s Income Statements from 2001

(in thousands) $ 2001 2003 2005 2007 2009 2011

Consolidated statement of operations:

Revenues:

Subscription and support 5,022 47,656 57,977 451,660 84,574 1,551,145

Professional services and other 413 3,335 18,398 45,438 92,195 05,994

Total revenues 5,435 50,991 176,375 497,098 1,076,769 1,657,139

Cost of revenues:

Subscription and support 1,730 7,199 12,727 61,457 127,082 208,243

Professional services and other 1,692 3,164 20,727 57,433 93,389 115,570

Total cost of revenues 3,422 10,363 33,454 118,890 220,471 323,813

Gross profit 2,013 40,628 142,921 378,208 856,298 1,333,326

Operating expenses:

Research & development 3,366 4,648 9,822 44,614 99,530 187,887

Marketing and sales 25,392 33,145 96,311 252,935 534,413 792,029

General and administrative 6,855 12,958 30,268 84,257 158,613 255,913

Lease recovery (abandonment) -

Total operating expenses 35,613 50,751 136,401 381,806 792,556 1,235,829

Operating income (33,600) (10,123) 6,520 (3,598) 63,742 97,497

Interest income (Investment income) 1,715 572 2,621 14,975 22,774 37,735

Interest expense (42) (178) (191) (107) (24,909)

Gain on sale of investment - - - -

Other income(expense) 63 98 12 1,310 (817) (6,025)

Loss/Income before provision (31,864) (9,631) 9,153 12,496 85,592 104,298

Provision (benefit) for income taxes (1,217) (9,795) (37,557) (34,601)

Income (loss) before minority interest (31,864) (9,631) 7,936 2,701 48,035 69,697

Minority interest in consolidated joint 193 292 (590) (2,220) (4,607) (5,223)

Net income (31,671) (9,339) 7,346 481 43,428 64,474

Source: Salesforce.com’s annual reports and SEC filing in 2003

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Exhibit 4

Salesforce.com’s Stock Price since its IPO in June 2004

Source: http://finance.yahoo.com

Exhibit 5

Trend in the Number of Salesforce.com’s Customers

Date # of customers

Jul, 2011 104,000

Oct, 2010 87,200

Jul, 2009 63,200

Oct, 2008 51,800

Jan, 2008 41,000

Jan, 2007 29,800

Jan, 2006 20,500

Jan, 2005 13,900

Jan, 2004 8,700

Jan, 2003 5,700

Jan, 2002 3,500

Jan, 2001 1,500

Source: Salesforce.com’s website

$0

$30

$60

$90

$120

$150

$180

Stock price

Jan 2001 Jul 2011 Jan 2006 Jul 2009

06/23/2004 04/18/2012 06/16/2008 07/04/2011

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Exhibit 6

Selected Milestones of Salesforce.com

1999 � Founded salesforce.com company in San Francisco

2000 � Launched first online sales force automation solution

2001 � Launched first online CRM app encompassing sales force automation, marketing

automation, and customer service and support � InfoWorld’s Top 10 Technology of the Year � Cited as “Fastest Growing Online CRM Company” by Morgan Stanley

2002 � Launched Salesforce CRM Enterprise Edition with advanced functionality

2003 � More than 400 employees with operations in USA, Australia, Japan, and Europe � Awarded Best Hosted Application by InfoWorld

2006 � Launched AppExchange � More than 400 AppExchange applications created by salesforce.com partners and

developers

2007 � Launched Force.com � 700+ applications available on AppExchange � Ranked #3 on Forbes Top 25 Fastest Growing Companies

2008 � 85,000+ custom applications built on the Force.com platform � 800+ applications from 460+ partners available on AppExchange � Ranked #2 fastest-growing technology company behind Google by Forbes � Launched Salesforce CRM for Google Apps

2009 � Launched first application built on Force.com for the iPhone � Launched Salesforce for Twitter � 200 native applications available on AppExchange � 110,000 custom applications built on the Force.com platform

2010 � 4,750 full-time employees � 185,000 custom applications built on the Force.com platform � 400 native applications—and more than 1,000 total apps—available on AppExchange � Launched Database.com, the enterprise cloud database � Named to “100 Best Companies to Work For” list (3rd consecutive year) by Fortune � Named to “100 Most Trustworthy Companies” list by Forbes

2011 � Launched Chatter.com � Acquired multiple industry leading technology services: Dimdim, Manymoon,

Radian6, Assistly, Model Metrics

Source: Salesforce.com’s website