Salesforce.com Dangles A Big Carrot

The new partner referral program, slated to launch Feb. 1, calls for participants to pay Salesforce.com a 10 percent referral fee on first-year revenue from all sales they close in conjunction with the company, either through AppExchange or with a push from Salesforce.com's direct sales staff. In return, Salesforce.com is offering referral-program participants premium AppExchange placement and eligibility for its incubator program and marketing campaigns, which carry additional fees. A second tier of the partner program, Premium, is slated to go live in August. For a 25 percent referral fee, Salesforce.com will offer partners seminars with its direct sales staff to pitch their wares, along with other demand-generation programs.

"We've gotten pretty consistent feedback that our partners are pretty interested in sharing revenue with us in exchange for being more deeply integrated in the marketing and business operations of our company," said Ariel Kelman, senior director of platform product marketing at San Francisco-based Salesforce.com.

Salesforce.com's plan inverts the traditional channel formula by casting the larger vendor as the channel for its smaller ISV partners. One of its key assets is a honeypot of 556,000 paying subscribers for its Software-as-a-Service (SaaS) sales-force automation system. That SaaS-savvy pool of potential customers gets some partners salivating—particularly smaller ISVs chasing venture-capital investments.

Marjie Zander, president of early stage Web conferencing provider ClearMeeting, said she's willing to give Salesforce.com a cut of sales it helps drive for the Northfield, Ill.-based ISV. "We believe Salesforce.com will be a significant channel for us," she said. "They're such a good fit, focused on the niche of people who do sales prospecting. Our tool is very low-tech and attractive to those users."

On the flip side, some longtime AppExchange partners are questioning the returns they get for the fees Salesforce.com charges.

"Like many other Salesforce.com marketing 'ideas,' we'd like to see the proof before eating the pudding," one AppExchange partner said about the new referral fees. About half of his company's sales involve Salesforce.com, but only a small fraction are driven by AppExchange. After spending tens of thousands of dollars with Salesforce.com for presence in marketing campaigns and customer events, his company is reluctant to spend any more without more impressive returns.

Financial analyst Pat Walravens of JMP Securities highlighted partner concerns in recent research notes on Salesforce.com. "Key partners [suggest] AppExchange is not delivering an ROI on their investments," Walravens wrote. "While the company continues to dedicate significant marketing effort to its AppExchange platform, our due diligence suggests it needs significant technology upgrades to catch up to the marketing promises."

The belated fulfillment functionality, due at the end of next year, is an example of AppExchange's technology gap. While Salesforce.com CEO Marc Benioff has referred to AppExchange since the day it launched as an iTunes- or eBay-like market, it's been an eBay without a checkout—more a billboard than a transactional sales site. Customers can click "Get It Now" and download partner applications, but partners must set up their own systems for charging customers.

Several partners said they found that surprising and had expected AppExchange to already have those functions. Fulfillment tools are finally on the road map: In December 2007, the company plans to release AppStore Checkout, which will offer billing, invoicing and collection services for software sold through AppExchange. The AppStore Checkout service will carry a 20 percent commission fee.

Salesforce.com launched AppExchange 16 months ago. How much revenue is actually flowing through the site to partners remains an open question. Benioff has thrown out dramatic numbers like $100 million, but the company doesn't break AppExchange out in its financial reports. With no transactional back end, AppExchange-influenced sales aren't easy to track. Analyst Joshua Greenbaum of Enterprise Applications Consulting got a chilly response from Benioff when he pressed him on the issue.

"It's been really hard to find out whether anyone is really making money doing this. The top AppExchange applications are always free things from Salesforce.com itself," Greenbaum said. "Most of the partners I talk to have told me privately that it's an excellent positioning strategy and a way to ride on the Salesforce.com juggernaut, but in terms of direct money to the bottom line, it's not exactly the biggest and most successful thing."

Since AppExchange launched, Salesforce.com has toyed with various strategies for profiting from partner participation. A basic listing on the site is free—voluntary "certification" for an application costs $10,000—although some early partners had contracts that called for them to pay commissions. VerticalResponse, an e-mail marketing services firm whose application is one of the few third-party offerings that consistently ranks among the most popular downloads on AppExchange, recently renegotiated its contract to eliminate commissions.

"We decided it was in the best interests of the partnership for us not to be the only ones paying that," said Janine Popick, CEO of VerticalResponse, San Francisco.

Other AppExchange early adopters like Intacct, QuestionPro and DreamFactory said they haven't paid for AppExchange but always assumed that Salesforce.com would eventually introduce participation fees. Some say they're not bothered by the idea of new fees.

"We think AppExchange is excellent," said Kevin Battey, COO of Seattle-based QuestionPro. "The leads we get are very solid leads."

Popick also is interested in the new referral program. Her company saw an instant boost in its sales volume when AppExchange launched. "It used to be that we were at the mercy of a Salesforce.com employee knowing about us so they could pitch us as a solution," she said.

If enough partners feel that way, Salesforce.com's referral fees could indeed be a positive for both sides. But for that to work, the company will need to demonstrate that it can translate its customer pipeline into closed deals for its partners.

"I don't see this as fundamentally different from how a channel always works. In general, the best relationship is one that's synergistic," Greenbaum said. "But one of the fundamental questions, in my mind, is whether there really is an aftermarket for Salesforce. I think one of the reasons companies buy Salesforce.com is as a stopgap measure. If that's true, then AppExchange isn't going to be that much of a revenue source for partners—if relatively few customers are extending the system and integrating it into the rest of their enterprise."

Finding the right balance of profiting off partners without alienating them by reaching too deeply into their pockets will be Salesforce.com's top challenge as it rolls out its new program. One AppExchange vendor who's happy with the partnership overall said the proposed referral and checkout fees are unseemly high. Still, he said his company might have little choice but to fork over the cash. With its huge user base, Salesforce.com dangles a big carrot—and wields a big stick. "They're the largest of the [sales-force automation] players," he said. "We have to play along."