On-demand CRM: From Top-lines to Bottom-lines (Strategic Focus)

The on-demand CRM model is expected to witness solid growth rates over the medium term. However, many on-demand vendors are witnessing unique competitive pressures and are yet to find profitability. Datamonitor feels that a confluence of traditional go-to-market strategies and distinct technological initiatives could help vendors expand their reach and achieve sustainable profitability.

Report Highlights
The on-demand CRM model has is gaining rapid adoption and is expected to witness double digit growth rates. However, achieving profitability still remains a challenge with most vendors. Vendors are spending unusually large portions of their revenue in marketing efforts and not utilizing their assets and datacenters optimally.

As on-demand CRM providers start offering comprehensive solution suites, integration and interoperability will the key differentiating factors. Vendors that will be able to deliver industry-centric customization, SOA-oriented approaches to integration, and platform-as-a-service will also add value.

Datamonitor analyzes the changing dynamics of the market and expects go-to-market strategies to evolve beyond web delivery of services. To deliver successfully, vendors will need to form extensive partnerships that expand the sales organization, increase industry-centric customization, and foster integration efforts.
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Overview 1
Catalyst 1
Summary 1
Key Messages 2
The adoption of the on-demand CRM model is accelerating 2
Profits are still not materializing due to the intrinsic inefficiencies of fast-growth markets 2
Competitive pressures are unique in each enterprise size-band 2
CRM end-users need to be better educated on the benefits of the model 2
Integration and customization are turning out to be the key technological differentiators 2
Partnerships and industry-centric customization efforts are shaping go-to-market strategies 2
Table of Contents 4
Table of figures 5
Table of tables 5
Market Opportunity 6
CRM is an established business methodology and a mature enterprise application 6
Multiple licensing and delivery alternatives claim to be the panacea to legacy CRM's woes 6
The on-demand CRM model will offer accelerated growth, especially over the mid-term 9
Ignoring the on-demand CRM model is no longer an option 10
Revenue growth rates of on-demand providers exceed the industry average 10
Some on-demand vendors expand the market, while others eat into the share of on-premise vendors 12
Profit margins are not clear yet and breaking even could take more time for on-demand providers 12
Selling and marketing costs are high for on-demand providers 15
On-demand providers' asset turnovers are currently lower than those of pure on-premise vendors 16
Maintaining and improving asset utilization will be crucial 17
Revenue growth will need to be balanced with increased asset utilization 19
Vendors managing a hybrid portfolio may have to deal with cannibalization 20
Profiting from high-growth opportunities will require focus on operational excellence 20
Technology Evolution 22
Social computing is helping CRM to become customer friendly 22
The evolution of on-demand offerings will increase integration complexities 24
The integration complexities of on-demand solutions are increasing as end-users rely on them more 24
Green-field users are skeptical of on-demand solutions and have limited integration needs 25
Intermediate level users test on-demand solutions with intentions of scaling up 25
Progressive users typically deploy multiple on-demand solutions or comprehensive suites 26
Mature level users have complete reliance on on-demand solutions 26
Multiple approaches to integration address different pain-points, but complicate pricing 26
Platform-as-a-service offerings gathering momentum 27
Development and application exchange communities are also fueling the growth of on-demand CRM 28
Platforms and collaboration communities will help to produce diverse solutions 29
Integration and customization will be key, but paths to achieve them may differ 30
Customer Impact 31
The on-demand model needs to be marketed better to the CFO's office 31
On-demand subscription fees impact the financial statements differently than on-premise license fees 31
Capitalization adds assets and results in amortization expense 31
Expensing treats subscription fees as period expense 32
On-demand fees which are expensed move front-end capital expenditures to operational expenditures 33
The on-demand model may be more relevant in times of tight liquidity 34
The on-demand model may reduce business continuity risk for end-users 34
Security concerns still evoke emotional responses and will take time to be dispelled 35
Remote access to CRM could improve the effectiveness of a sales force 35
Vendors need to communicate financial, social, and security benefits of the model better 36
Competitive Landscape 37
The multiple categories of vendors have led to a disjointed market structure 37
Multiple levels of competition exist in the on-demand CRM market 37
Vendors catering to the mid-segment will experience the greatest competition 39
The on-demand model will be stress tested in large enterprises 40
Finding profitability in the smaller segment could be challenging given price sensitivities 41
Freemium and open-source on-demand CRM could democratize the lower end of the market 41
Open source on-demand CRM is catching up 41
Freemium is attractive to the price-sensitive customer 41
Competition at each user size-band will vary, as will competitive strategies 43
Go to Market 44
Develop partnerships to expand reach, improve vertical offerings and push integration 44
The need for verticalization will shape go-to-market strategies 45
Verticalization can be delivered through a confluence of company initiatives and partner efforts 46
Vendors should be cautious of over promoting their solutions and losing customer trust 48
Segment customers and deliver unique messages at each segment to avoid marketing clutter 48
Recommendations 48
Tailor go-to-market approaches based on end-user size and expected profitability 49
Mid-market will continue to be the sweet spot 49
Large enterprise sales will require a strong reseller base along with mature offerings 49
Targeting smaller businesses could be difficult 49
APPENDIX 50
Definitions 50
Methodology 50
Further reading 51
Ask the analyst 51
Datamonitor consulting 51
Disclaimer 51
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Table 1: Basic feature matrix - on-premise CRM versus on-demand CRM models 8
Table 2: Level of end-user maturity decides dependence on the on-demand model 25
Figure 1: Major on-demand vendors report substantially higher growth rates than on-premise vendors 9
Figure 2: Major on-demand vendors report substantially higher growth rates than on-premise vendors 11
Figure 3: Gross profit margins do not yet follow clear patterns 13
Figure 4: The majority of on-demand vendors are yet to break even 14
Figure 5: NetSuite's net profit margin has not been positive to date 15
Figure 6: Sales and marketing expenses are higher for on-demand vendors 16
Figure 7: On-demand vendors report lower asset turnover ratios than pure on-premise peers 18
Figure 8: On-demand vendors report high revenue growth rates but lower asset utilization 19
Figure 9: Effects of the on-premise model on the financial statements of end-users 32
Figure 10: Effects of the on-demand model on the financial statements of end-users 33
Figure 11: The pure-play on-demand model faces competition from other models 38
Figure 12: The high growth in the mid-segment will usher in competition 39
Figure 13: Growth opportunities and vertical penetration will decide verticalization strategy 47
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