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Friday, August 29, 2008

To Sell Online Software, Firms Must Employ Old-School Tactics

Many tech-industry watchers say online software will be the way most businesses prefer to buy software in the future. But to reach these customers, the upstarts that deliver software this way will have to adopt a sales strategy a lot like those of the traditional software companies they are trying to displace. That is because online software doesn’t just sell itself.

Unlike traditional software, which businesses run on hardware they own and operate, workers access online software, also known as software as a service, through a Web browser. It works the same way as an email account from Google or an online photo-sharing service from Yahoo. There is nothing to install, so workers can start using online software without the aid of the tech department. That makes it easier for companies that sell online software to get into a business than their on-premises competitors.

Seizing on this, investors bought into online-software companies in a big way. During the first 10 months of 2007, shares of 15 online-software companies tracked by Thomas Weisel Partners increased in value 61%. Since then, however, these companies have lost about a third of their value.

Wall Street has realized that it isn’t enough to simply offer online software—you have to have a sales strategy that can make your offering a corporate standard. It is possible to get individuals, project teams or small businesses to buy online software through word-of-mouth marketing, but it is hard to make money from these groups—at least the kind of money necessary to become a billion-dollar company.

In order to get there, they can’t operate like an Internet start-up, letting their technology spread virally as end users hear about it. They need to sell to the same executives and information-technology professionals who made purchasing decisions before online software was an option. Businesses have a lot riding on the decision to use one product or another. And while having pockets of workers advocate for a particular piece of software is a plus, the execs who sign the big checks still want to see demos, vet the seller and do all the things they have always done when they buy software.

Many shipping software companies have learned this lesson. So they are investing heavily in sales and marketing. And no public software-as-a-service company has invested more as a percentage of revenue than SuccessFactors, which makes employee-performance-management software. In its most recent fiscal year, SuccessFactors spent 108% of its revenue on sales and marketing.

The reason: “You have to spend the money to get there,” SuccessFactors Chief Executive Lars Dalgaard tells the Business Technology Blog. While 108% may sound over-the-top, SuccessFactors, which anticipates revenue just over $100 million in 2008—and other companies like it—is trying to expand dramatically. Dalgaard recently hired one sales group that targets midsize businesses and another to target small businesses. As the company expands into Europe and Asia, he is also hiring teams that speak local languages.

Many of the software vendors that rose to the billion-dollar-revenue level a decade ago have either stalled or been acquired. And there is a void in the industry that software-as-a-service companies are racing to fill.

It is just going take a while. “It’s hard to get to buy from you,” says Dalgaard.