Before several hundred people in a midtown Manhattan theater Wednesday, SAP CEO Henning Kagermann said the company's new on-demand software is the start of a "new era" for SAP. "I'm now 25 years in this company, and I can say it's the most important announcement I've made in my career," Kagermann declared.

The new software, to be widely available next year, is called SAP Business ByDesign. Formerly known as A1S, it automates a wide range of business processes, from supplier management to customer relationship management to budgeting and planning. Companies can subscribe to it for $149 per user per month.

Yet despite the pomp and circumstance in which SAP rolled out the product, executives were specific on one important point: it's targeted at new SAP customers with 100 to 500 employees. "It's not a solution for larger enterprises," Kagermann said. "It's not a solution for midmarket companies who have high demand, deep demand for vertical solutions."

SAP's strategy to pitch the product to such a narrow market segment underlies both technical and financial challenges for the company. SAP provided an impressive demo of Business ByDesign, demonstrating the ease with which a business user could customize the service with simple drag and drop functions. But the sacrifice of such simplicity for users is that customization options are limited.

The narrow segmentation also helps SAP protect its existing cash cow of software licenses that its customers pay for up front, and keeps it in good standing with channel partners that also have benefitted from those big on-premise implementations. Because on-demand software is paid for on a monthly subscription basis, pursuing a larger customer base or pitching the offering to existing customers would spell financial suicide for the company.

Still, the offering is likely to get solid interest and a healthy reception from SAP's targeted customer base (although it's calling 100 to 500 customers "midmarket," that's really the low end of the midmarket by most companies' definition). SAP said it estimates there are some 60,000 companies that haven't yet invested in integrated business software suites in Germany and the U.S. alone that would be appropriate for ByDesign, and said the market potential for Business ByDesign is $15 billion, compared to $30 billion for users of its SAP Business Suite for large companies. Business ByDesign falls under Business All In One, an on-premise suite targeted at companies with fewer than 2,500 employees, but above Business One, on-premise software designed for 100 or fewer employees.

Peter Zencke, an SAP executive board member who heads up development at SAP, said the new product is the culmination of four years of development involving 1,000 employees. "This is not just service-enabling of features and functions that exist; it's taking service events and service consumption as a base principal to design a solution," he said. "No one has done that so far."

With the offering, SAP is going up against Workday, Netsuite, Salesforce.com, and a host of other startup companies offering specific on-demand software applications. But the company's experience in ERP software will likely give it one competitive edge over those companies. Kevin Flanagan, CEO of Compass Pharma Services LLC, an early user of Business ByDesign, said he selected the product because it "gave me a comfort level" knowing it was SAP.