Profitability may be elusive for on-demand CRM

On-demand CRM vendor Entellium's financial troubles, complicated by fraud charges against executives, might prove to be a cautionary tale for other vendors as well as existing and prospective customers.

News recently broke that Entellium's former CEO and chief financial officer had drastically overstated the company's revenue for years to entice investors. The executives have been charged with wire fraud and the Seattle company's future is in doubt.

But Entellium's financial woes -- which appear serious, aside from the executives' alleged wrongdoing -- might be a warning sign for CRM (customer relationship management) vendors.

While there is plenty of global market growth -- on-demand CRM subscription revenue will more than double by the end of 2013 to US$3.8 billion, according to Datamonitor -- profitability is not guaranteed, the research firm said.

Datamonitor said vendors should look past merely growing top-line revenue numbers and focus on cutting operational expenses, along with getting more mileage out of existing assets.

On-demand vendors should also move to form partnerships to boost their sales channel and help them meet specialized customer needs, according to Datamonitor.

"Verticalization and customization will be the new battlefields of on-demand vendors, and go-to-market strategies will also need to change accordingly," the firm said.

CRM vendors contacted this week said their operations are sound, albeit citing different reasons.

"Scale is what makes the difference here. With 47,100 customers, over 1.1 million subscribers, and approximately 170 million transaction daily, Salesforce.com clearly has scale," Salesforce's vice president of corporate strategy, Bruce Francis, said in an e-mail.

Francis pointed to Salesforce's second quarter fiscal 2009 results, which showed earnings of $0.08 per share, up 167 percent year-over-year. That translates into about $10 million in net income on revenue of roughly $263 million.

"We feel that the advantages of cloud computing will be very clear in this kind of environment. Customers will be much less willing to make big risky bets on mega-purchases of software and hardware for on-premise solutions," Francis added.

Wall Street has apparently not shared Francis' confidence in Salesforce. Its stock price has steadily fallen in recent months, from around $74 in June to about $26 in early trading Friday.

In addition, Salesforce's chief financial officer recently predicted a price war could erupt among on-demand vendors. Such a development -- which may have begun on Wednesday, with rival NetSuite's announcement of a discount deal for Salesforce customers who defect -- could further crimp profits.

Meanwhile, a much smaller on-demand CRM vendor also reported business is stable.

Troy Muise, CEO of Salesboom.com in Halifax, Nova Scotia, said his company is essentially breaking even, but deliberately so, as it chooses to invest revenue back into the product for now.

Salesboom has 4,000 customers and aims at small and medium-sized businesses and departments within large companies, he said.

Muise and his co-founder self-funded the company, which was formed in 2002. "Being independent has its advantages in times like these," he said, adding that even without the Entellium executives' alleged fraud, that company may have had trouble getting an additional round of venture capital given the weak economic climate.

Salesboom focuses on growing its customer base through referrals, not advertising, he said. "We're a different animal than the massive companies. I don't have that kind of budget. I can't play that game."

But Muise argued that Salesboom's size enables it to stay closer to customers and their needs, helping its retention rate. "When you're big and fat and not nimble anymore, and you're drunk off your own success. ... that is when your churn goes up," he said.

One industry observer said the profitability question doesn't apply across the board for on-demand vendors.

"One of the things we forget about when we start talking about profitability is that all companies aren't the same," said Denis Pombriant, managing principal of Beagle Research Group in Stoughton, Massachusetts.

Emerging companies should be focused on reinvesting in the company rather than taking profits, according to Pombriant.

"Fundamentally, if you do any kind of long-term economic analysis, emerging on-demand companies today are doing exactly what they should be doing," Pombriant said.

However, he agreed with Datamonitor's points regarding vendors' need to build out a sales channel and diversify their products over time.

"That's very classic company maturation," he said. "[But] the other thing that is very important for companies to figure out is if long-term, what they have is a whole product, or is really in the future going to be a feature of some other larger product set. ... Is a company going to acquire, be acquired, or go out of business?"