Salesforce needs to start thinking about returning profits to its shareholders, which will likely mean pressure on customers to spend more with the cloud CRM company, higher prices and less innovative products, analysts at Forrester have warned.
In order to compete with the big four enterprise software vendors - IBM, Microsoft, Oracle and SAP - Salesforce has made a commitment to its investors that it will achieve $10 billion in revenues in the next few years, and then aim for $20 billion. However, the original Salesforce CRM software, for which the company is known, will not support this revenue growth on its own, Forrester says. This means that the vendor will need to find a way to encourage its over 150,000 customers to spend more with it.
“What is good for Salesforce’s investors is not necessarily good for its clients,” Forrester said in its recent report, ‘Salesforce Is Bidding To Be Your Strategic Customer Platform; Should You Accept?’.
“The strengths that have made Salesforce such an appealing choice for its clients - product focus, technical coherence, and commitment to customer success - as it has grown to $5 billion in revenues will be hard to retain as a much larger and more complex vendor.
“In planning their Salesforce relationships, CIOs must approach the vendor as a potential strategic provider, rather than as a vendor of point solutions. Never surrender leverage in the relationship without massive compensation in return for doing so.”
Before and after 2017
Forrester predicts that 2017 will be the crunch year for Salesforce because its revenue growth rate has and is showing a decreasing trend (from 30 percent growth each year between 2011 and 2013, down to 21 percent growth in 2017). It says the revenue growth rate will probably slow even more after 2017, at which point shareholders will start to put pressure on Salesforce to stop spending whatever it wants to attract and retain customers, and make tough decisions on where to raise prices and cut costs and services.
It will be unlikely that the company will be able to give its revenue the boost it needs through acquisitions onto its Force.com platform, said Forrester. The vendor promotes the platform as a way to bring in external developers and to draw its customers in further by providing a range of products that could not be developed internally. However, Forrester thinks that competition from other SaaS vendors and the four big enterprise software leaders make this route implausible.
“Instead, Salesforce will gain a presence in operational applications through partners with apps built natively on Force.com, such as FinancialForce.com, Kenandy, and Rootstock in ERP, and Zuora in subscription management. These will bolster its platform revenues, but not enough to make a meaningful difference,” the analyst said.
The Salesforce ‘before 2017’ and ‘after 2017’ will therefore be two very different creatures according to the analyst.
In this year and next, Salesforce’s products and prices will not be that different to what customers have seen so far. However, Forrester believes that the vendor will become more aggressive in its sales tactics, to try and get customers to adopt more of its products and effectively lock them into an enterprise-wide Salesforce platform.
Salesforce will also continue to innovate and acquire companies in this period, but there are unlikely to be any major acquisitions over the next two years.
Salesforces gets expensive post-2017
As the investor pressures hit, Forrester warns customers to expect Salesforce to offer more enterprise licenses with relatively fixed and inclusive prices - that do not cover new products that the company builds or acquires.
Customers should also not be surprised if the quality of Salesforce’s products “stumble a bit” as it expands its product portfolio.
“It is hard for a vendor to be best-in-class in every product category,” said Forrester.
“Based on what we have seen with other vendors with broad portfolios, its oldest products, like Sales Cloud and Services Cloud, are likely to slip over time from best-in-class to middle of the pack as competitors catch up, while acquired or new products will follow the opposite trajectory.”
Advice for CIOs
With these upcoming changes, Forrester has recommended that CIOs keep using the good Salesforce products, but with an open mind.
To keep a handle on costs, CIOs should focus on creating a cap on spending with Salesforce, and make the real cost of Salesforce, and alternative, solutions, visible to the business.
“Add the costs of customisation, integration, data migration, operations and third-party licences in your analysis to obtain a true picture,” the analysts said.
Forrester also advised CIOs to not rush to adopt both Sales Cloud and Marketing Cloud, because the two products are not yet fully integrated.
“Integration will expand, but there’s no reason to rush to adopt one if you’ve got the other. Be deliberate. By doing so, you’ll retain more potential leverage with Salesforce and the ability to find more optimal choices when and where they exist,” said Forrester.