Software as a service: Pay as you build, but at what cost?

See correction below

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Last week saw the official launch of AppExchange, which exposes the Salesforce.com APIs to third-party software providers: 160 of them, at present. When certified, ISVs can plug their applications into the main application, giving users access to a plethora of unique features that are not available from Salesforce.

Here’s a taste of the programs you can plug in. Before the Call offers a suite of sales intelligence software for $75 per user, per month. BigMachines SPP (Selection, Pricing, and Proposal) generates proposals for $49.50 per user, per month. Selectica Fastraq improves speed and accuracy of product configuration, quoting, and pricing, for $65 per user, per month. Sendia WorkSpace CRM provides wireless access to AppExchange applications from a handheld for $49.95 per user, per month. Similarly, Sybase iAnywhere Sales Anywhere provides access to Salesforce from Windows Mobile for $21 per user, per month.

I got to wondering, what if you were committed to the SaaS (software as a service) architecture and needed all 160 programs to run your business properly? With an average service fee of $50 per user, per month multiplied by 160 plug-ins, you get $8,000 per user, per month. Multiply that by 12 months and a dozen users and it comes to $1,152,000 a year.

Ridiculous? Of course it is. However, therein lies a kernel of truth, not just about Salesforce, but for the entire SaaS model.

Although the fees are relatively low, consider the total cost of owning each service. Each AppExchange provider hosts the application on its own platform. Use just the above examples and you have five additional contracts to manage, SLAs to oversee, networks to deal with, and invoices to review and pay.

As I said before, these applications exist because they offer features not available from Salesforce. Truth is, SaaS tends to be 100 miles wide and about an inch deep. Although you may not need 150 additional applications, you may be surprised at how many you do need.

I spoke with Fred Walters, CEO and co-founder of Before the Call. He says CRM users will need anywhere from two to five additional applications in any one of the functional CRM areas to have a complete SaaS package. Considering CRM has SFA, marketing, and customer service, that means anywhere from six to 15 additional applications.

For example, instead of the $75 per user, per month for its entire Before the Call suite, the company offers the verification and lead-enrichment service component of the suite for $25 per user, per month. See what I mean?

Walters, being an AppExchange provider, counters that companies will be better off spending their money on multiple SaaS plug-ins, rather than spending it on bigger packaged apps.

So is it death by a thousand cuts, or does SaaS offer a graduated scale of functionality? You will have to decide. But before you do, consider this.

SaaS providers will very quickly face the reality that, unless they are a provider of a major service with broad reach, they will not be able to charge even $25 per month. Expect prices for nice-to-have utilities to drop as low as $5 per user, per month.

In about a week, SAP will announce what has long been rumored: its SaaS for CRM solution. When SAP enters the market with an SAP-class SaaS offering, my guess is that it will force other providers to redefine what the baseline for a service offering is. Stay tuned.

Correction:
In this article, AppExchange’s Before the Call name was misrepresented. InfoWorld regrets the error, which has been corrected.