Traditionally, to win in the software business, you’ve got to spend big in sales and marketing. SugarCRM, as part of the open source movement, thinks there’s a better way.
So far, the big winners often come out of the Oracle camp of take-no-prisoners marketing, where Larry Ellison and his protégés (Tom Siebel and Marc Benioff) sleep with a copy of Sun Tzu’s The Art of War under their pillows. “Nice guys finish last” seems to fit software industry executives, with rare exceptions.
John Roberts, SugarCRM co-founder and CEO, has spent enough time in enterprise software (at E.piphany, BroadVision and Baan/Aurum) to know how the game is played and where the software model is broken. In my Inside Scoop interview with Roberts last year, he said “the market today has really been dominated by great sales and marketing and very little innovation on the engineering side.”
The Open Source Way
Open source proponents have a different strategy. Instead of hiring developers and then pushing the product into the market, recruit an army of volunteer developers to build a free open source product. That’s how Apache was created, which powers nearly 60% of all web sites.
MySQL become one of the most popular open source databases on the planet, used on small web sites to the very largest, including Google.
With a community of programmers building and improving code, its gets better way faster than any company can do it. I certainly hope so, because this CustomerThink web site runs on the LAMP stack of open source technology: Linux, Apache, MySQL, and PHP.
I’m pretty sure all this happens with nary a press release proclaiming industry leadership, or any software CEOs spouting off to the media.
Will Open Source Work for Applications?
The knock on open source software is that it’s built by geeks, for geeks. Critics say it’s fine for infrastructure, but applications need a real company behind them to make it easy to implement and use, and to provide support you can count on.
RightNow, for example, uses open source technology (LAMP) heavily, but shields the user from the technical issues with its on-demand delivery model. Founder/CEO Greg Gianforte believes that on-demand is the best way to monetize open source.
Maybe so, but on-demand is also a way to “lock in customers to proprietary technology,” said SugarCRM’s Roberts in his keynote at the company’s first Global Developer Conference (San Jose, May 3-4, 2007). And, he told me that Salesforce.com spends 70% of revenue on sales and marketing, while the new breed open source model flips that around: 70% on engineering. The theory being that more coders leads to better products. (I’m not totally convinced, but I can’t remember a marketing campaign creating a piece of software, can you?)
His point has merit, but Robert’s figures are a tad exaggerated. A quick search of a recent salesforce.com 10-Q found that the company spends about 50% of revenues on sales and marketing. That’s still quite a lot.
Making Money with “Free” Software
Maybe some of you are wondering, as I have, how does a software company make money if the software is “free”? You can bet that SugarCRM’s VC backers, who have poured millions into the firm, care about the bottom line.
The short answer is the free stuff may not have all the functionality you want, and there’s no formal support program. You’re on your own to surf the forums and get help from the community. For more robust functionality and/or formal support, you’ve got to pay.
From my personal experience I can tell you it’s a bit unnerving to depend on volunteers, but the results have been good for our business thus far. And I’ve certainly had plenty of examples of poor support from both traditional software and SaaS vendors, where support was supposedly part of the deal.
If you run a small business with less than 5 users, you may be happy SuguarCRM’s basic—and free—CRM capabilities: account, contact, opportunity, case, activity and reporting management. And community-based support, of course.
However, if you have 5 users or more, you’ll probably want functions like team management, quoting, enhanced reporting and Outlook integration. That’s available in the “Professional” version for $275 per user per year. For $449 per user per year, you can get the “Enterprise” version which adds offline client synchronization, Oracle support, and even more advanced reporting with SQL.
Does the Open Source Model Work?
It’s looking pretty good, so far.
In less than three years, SugarCRM has been downloaded a million times. How many downloads are being used? Nobody knows, because in the open source world, it’s not cool to require a registration or do follow-up marketing (take that, CRM!). If they like it and want the “commercial” version or other services, they’ll contact you.
In all, 1,200 paying SugarCRM customers have been created from this chaotic process, with very little money spent on sales and marketing. Roberts told me it was feasible that a few years from now, that figure could grow 20 fold.
Ponytailed Sun CEO Jonathan Schwartz, who made a guest appearance at the SugarCRM conference, put it this way: “Proprietary builds customers. Open source build communities.” He also noted that on-demand was the dominant trend, because the “majority of the world is not going to buy IT or run a server farm.”
The real battle is not on-demand versus traditional software. On-demand solutions are still, by and large, software company-centric: “We decide what to build and how to market, sell and support.” Customers may be involved, but don’t feel the kind of ownership that an open source software community does.
While open source is working its way out of geekdom to enterprises, it’s got a long way to go. I visited the SugarCRM site and tried to imagine myself as a regular business user, interested in trying a free open source CRM product and using it on my Windows computer. On the SugarCRM download page I got intimidated by the long list of modules, documents and patches. What do I do with all this stuff?
Then I found, in the Requirements section of Sugar Open Source Release Notes, the ever-so-helpful news that for a successful installation, “ensure that the MB String module is installed in your PHP libraries.”
Sure, SaaS leaders like salesforce.com, NetSuite and RightNow may not take advantage of a developer community to build and enhance its core CRM application. (Salesforce.com’s AppExchange enables developers to build and market add-on products). But I still think that using software-as-a-service appeals more to business buyers today. Just sign up and start using. Note: SugarCRM also offers an on-demand version, for $40/user/month.
The Future Will be More Open
What this means for the enterprise software industry is far from certain, but I think it boils down to the power of marketing versus the power of community. And communities can be enormously powerful.
That power can work for or against you. Look what happened at the Digg community, there the community decides what news gets posted and promoted. When the founders tried to censor some information, the community rose up and won that battle.
Aggressive marketing and sales in the software industry won’t go out of style anytime soon. But open source could make some real headway in the short term in the lower end of the CRM market—not good news for products like ACT! and GoldMine.
Longer term, I think we’ll see open source applications in the portfolio of even the largest enterprises. The same ones that once said they wouldn’t use MySQL or hosted applications like salesforce.com.