In an effort to spur sales of its products, Salesforce is launching a program to give third-party software vendors marketing help in exchange for a cut of sales.

Aaron Ricadela, Contributor

December 12, 2006

4 Min Read

Salesforce.com on Tuesday said it expects to book an additional $10 million in revenue next year as a result of fees and sales of its software, generated by a new program for independent software developers. Whether the company can wring more revenue out of its online software marketplace will be closely watched by investors looking for the rapidly expanding company to return to even higher rates of growth.

Even as Salesforce adds new customers at a fast clip—revenues grew by 57% during its third quarter ended Oct. 31—growth has slowed from earlier in the year. To remedy that, Salesforce CEO Marc Benioff on Tuesday unveiled a new sales and marketing program at a press conference in San Francisco, under which companies that sell add-on software for Salesforce.com could pay the company a percentage of their sales for help generating leads and closing deals.

In an e-mail interview, Benioff said he was unsure how much revenue Salesforce would book directly from the new fees, vs. from selling more seats of its app in conjunction with its partners' software. "It will take a year to see the model," he said. "No one has ever done this before so there are no precedents to go off of."

Salesforce, which makes sales management software that it delivers to more than 556,000 subscribers over the Web, has seen its business grow rapidly—analysts expect the company to report $495.4 million in revenue for the fiscal year that ends Jan. 31. That's up from $309.9 million last year. The company now says it expects revenues of $710 million to $720 million for its 2008 fiscal year that starts Feb. 1—$10 million more than it initially forecast. Shares of Salesforce.com (NYSE—CRM) rose $1.50 Tuesday to close at $40.05.

Salesforce sells more than 400 software programs on its AppExchange site from some 230 independent software vendors. Each time a customer wants to run one of those apps, including accounting, human resources, and marketing apps, it has to buy another end-user license from Salesforce. Now, Salesforce is trying to convert more of its partnerships into direct revenue.

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

Morris Panner, CEO of OpenAir, an $8 million-a-year maker of online accounting software, says participating in the program would explicate the benefits OpenAir gets by selling its software through Salesforce.com's site. "One of the things that's interesting about partnerships is, at what point is the partner incented to help us?" says Panner. "If we pay them, they will." Salesforce.com's sales reps often call OpenAir with suggestions about customers that are interested in hearing a pitch. Panner says he hopes paying Salesforce a percentage of its revenue on seats sold through the AppExchange will result in even more business. "It's all basically lead generation," he says. "Not to be reductionist about it."

One stock analyst, though, questions how much revenue Salesforce would generate next year from the new AppStore fees, and says the company's revised revenue estimate for fiscal '08 has more to do with its ability to sell premium versions of its customer relationship management software. "Investors like the up guidance—that's the main thing," says Steve Koening, a stock analyst at investment bank Jeffries & Co. The AppStore won't drive significant revenue, he adds.

Rather, the program is about providing more tangible sales and marketing benefits for companies selling through the AppExchange. "Some of the partners thought their needs weren't being met," Koening says.

According to Benioff, many of Salesforce.com's largest customers are installing the priciest version of its software, an Unlimited Edition that costs $3,000 per year, or double the list price of the next most expensive version. "Our best customers are moving to our unlimited offering," he said. Salesforce has already incurred much of the expense of the new AppStore program, added Benioff.

Salesforce is also putting its cubicle space up for sale. Next month, the company plans to start moving into a new office at the former headquarters of Siebel Systems in San Mateo, Calif., complementing Salesforce's San Francisco headquarters. Companies participating in the AppStore program will have the option to have technical, sales, or marketing employees work out of the new office—presumably with greater access to Salesforce's staff. "These ISVs need some hand-holding," said Benioff.

The price tag: $20,000 per cubical per year. Salesforce has sold 10 so far, a spokesman said.

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