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12/15/2006
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Salesforce Taps ISVs To Feed The Growth Beast

Partners will have the option of paying Salesforce a percentage of their sales on the AppExchange site for help in generating leads and closing deals.

Software-as-service pioneer Salesforce.com hopes to stretch its model even further by charging the independent software vendors on its online marketplace a percentage of their sales in return for helping them generate leads and close deals.

Benioff: Another business day, another business model turned on its ear

Benioff: Another business day, another business model turned on its ear
Salesforce now offers more than 400 software programs on its AppExchange site, from 230 ISVs. Each time a customer wants to run one of those add-on apps, including accounting, human resources, and marketing, it must buy an end-user license from Salesforce. Now Salesforce is trying to convert more of its partnerships into direct revenue.

The company will roll out in February the first phase of the program, called AppStore, under which vendors on AppExchange will have the option to pay Salesforce 10% of their first year's sales on the site in exchange for access to marketing help from Salesforce. In August, a second phase of the program will offer ISVs help in generating sales leads and closing deals in exchange for 25% of their first year's sales on AppExchange.

In an e-mail interview, CEO Marc Benioff says he's unsure how much revenue the company will book from the new fees, versus just selling more Salesforce licenses via its partners. But in raising its revenue forecast for the coming fiscal year by $10 million last week, the company cited AppStore's potential. "It will take a year to see the model," Benioff says. "No one has ever done this before, so there are no precedents."

IF YOU PAY THEM, THEY WILL HELP

Morris Panner, CEO of OpenAir, an $8 million-a-year maker of accounting software sold mostly on AppExchange, says Salesforce reps already call OpenAir with customer leads. So Panner hopes that paying Salesforce a percentage of OpenAir's revenue on seats sold through AppExchange will strengthen that relationship and drive more business. "One of the things that's interesting about partnerships is, at what point is the partner incented to help us?" he says. "If we pay them, they will."

Salesforce, which delivers sales management services to more than 556,000 subscribers over the Web, has seen its business grow rapidly. Analysts expect the company to report $495 million in revenue for the fiscal year that ends Jan. 31, up 60% from last year. The company said last week that it forecasts revenue of $710 million to $720 million for its coming year.

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But even as Salesforce adds customers at a fast clip--revenue for the third quarter ended Oct. 31 was 57% higher than in the year-earlier quarter--growth has slowed from earlier in the year. While Benioff says many of Salesforce's largest customers are opting for its Unlimited Edition service--at $3,000 per year, it's double the list price of the next most expensive version--he's looking for other avenues.

One analyst, though, questions how much revenue Salesforce will generate next year from AppStore fees. Steve Koening, with investment bank Jeffries & Co., says the company's higher revenue estimate for fiscal 2008 has more to do with its ability to sell its premium services. "Investors like the up-guidance--that's the main thing," Koening says. Rather, the AppStore program is about providing more tangible sales and marketing benefits for companies that sell through AppExchange. "Some of the partners thought their needs weren't being met," Koening says.

At Salesforce, it seems, everything is for sale. Next month, the company will start moving part of its operations to a new office at the former headquarters of archrival Siebel Systems in San Mateo, Calif., complementing Salesforce's San Francisco headquarters. Companies participating in AppStore will have the option of locating technical, sales, and marketing employees in that office for $20,000 a cube, presumably with greater access to Salesforce's staff. Says Benioff: "These ISVs need some hand-holding."

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