Economic woes may lower SaaS prices

The ongoing global economic crisis may spark a pricing war in the SaaS (software as a service) arena, according to a major vendor in the space.

During an appearance at an investor conference in New York this week, Salesforce.com chief financial officer Graham Smith discussed the company's readiness to lower prices in order to remain competitive.

[ Learn more about how the financial crisis is affecting IT and the high-tech industry, plus what IT can do to help, in InfoWorld's special report. ]

"It won't surprise me if going forward in these times that we see much more aggressive pricing. That's sort of typical," said Smith, who also addressed investors in London on Friday. "We are able to match pricing."

Smith indicated that Salesforce.com, known for its CRM software, is not about to run a closeout sale, however.

"My view is you have to sometimes be aggressive but equally, if you've got a small company that's being insanely aggressive on pricing, if I was a customer I'd be kind of nervous about that -- it speaks to their business situation," he said.

SaaS vendors typically cite a handful of purported advantages, such as no need to buy and maintain new hardware, faster deployment, and easier upgrades. Therefore, some price cutting may be at hand, but at the same time such factors could also compel more customers to adopt SaaS, according to Forrester Research analyst Ray Wang.

Also SaaS vendors may not be compelled to cut prices as much as companies that sell traditional licenses, said another Forrester analyst, Andrew Bartels.

That's because SaaS companies sell subscriptions, getting their money on an ongoing basis, and aren't necessarily scrambling as desperately to meet growth targets as a quarter ends, Bartels said. Meanwhile, it is common for major vendors to discount list prices for on-premise licenses by 50 percent.

But another observer believes Smith's prediction will be borne out in the market.

"We were already predicting something of a battle on pricing given how aggressive Microsoft is being around Dynamics CRM Online. I guess the economic doom and gloom just lifts that," said 451 Group analyst China Martens. "It's also a way for Salesforce to appeal to its smaller customers and retain them. I've yet to hear the same price-cutting story from other SaaS players name-checking the economy, but it's sure to come."

Beyond the world's economic woes, SaaS has now reached a certain level of maturity, and customers have had time to measure costs and their return on investment compared to on-premises software deployments, Martens said.

"There's also a sense that SaaS companies in general have been a tad opaque on pricing -- there's a base price for [sales force automation] but then customers have to pay extra for stuff like integration and other modules they might have thought would be part of the package," she added. "I'm sure customers are turning around to Salesforce and asking for more transparency on pricing from the get-go."