Time for a New Software Model
Sales and marketing costs are dragging down the enterprise software business. Open source offers one way to resurrect it.
By Larry Augustin
Nov. 11, 2005
Ask a software vendor about the benefits of Open Source and you'll get a few stock answers. It's inexpensive. R&D costs are lower. Developers are plentiful.
But few vendors realize the true operational leverage that Open Source offers in sales and marketing.
The problem is that the traditional enterprise software business model is broken. A rabid search for new customers and revenue growth has caused sales and marketing costs to spiral out of control. In fact, Rick Sherlund at Goldman Sachs estimates that in 2005 software companies will spend 82 percent of new license revenue on marketing and sales efforts. That's up from 66 percent in 2000.
This quest for additional revenue has created an untenable cost structure for the industry - one that doesn't serve vendors or their customers. In essence, vendors spend a lot of money to convince customers to buy, and then charge them a lot of money for the license which covers the sales and marketing costs. We're charging the customer just to sell to them.
Enter Open Source
The Open Source model turns the marketing problem on its head. Customers can look at, evaluate and review software without contacting the company that will sell it to them. Consider companies like SugarCRM (customer relationship management), JBoss (J2EE middleware), or Pentaho (business intelligence). The customer says, "I want something like that." He locates the Open Source version of the product, downloads it and is using it before the company is involved.
The sales cycle of a traditional enterprise vendor is just too long. It takes several months to get the right sales meetings, convince the CIO, sign a deal, do a pilot - maybe the customer spends a little money at this point but not much - evaluate it, follow it with a beta phase, and then hope for a real sale. That's one and a half years to get the deal. All along, the software vendor is convincing the customer to buy.
Back at the company that deployed the Open Source solution, the CIO is happy with the software. But after using it for a while, begins to wish for documentation, a live-person to ask questions, a phone number for support, and so on. At that point, the customer calls the company saying, "I've been using your product for a year and now I need your help."
This is a great sales situation. The user already considers the product mission critical to their business. No pilot is needed. The salesperson only needs to convince the user to become a paying customer - not convince them about the value of the technology.
This allows Open Source vendors to hire a different type of salesperson. At an enterprise vendor, the cost of a good sales rep is a minimum of $250,000 per year. If he or she is responsible for a $2.5 million quota, that salary alone is 10 percent of the vendor's revenue - a hefty chunk.
But few vendors realize the true operational leverage that Open Source offers in sales and marketing.
The problem is that the traditional enterprise software business model is broken. A rabid search for new customers and revenue growth has caused sales and marketing costs to spiral out of control. In fact, Rick Sherlund at Goldman Sachs estimates that in 2005 software companies will spend 82 percent of new license revenue on marketing and sales efforts. That's up from 66 percent in 2000.
This quest for additional revenue has created an untenable cost structure for the industry - one that doesn't serve vendors or their customers. In essence, vendors spend a lot of money to convince customers to buy, and then charge them a lot of money for the license which covers the sales and marketing costs. We're charging the customer just to sell to them.
Enter Open Source
The Open Source model turns the marketing problem on its head. Customers can look at, evaluate and review software without contacting the company that will sell it to them. Consider companies like SugarCRM (customer relationship management), JBoss (J2EE middleware), or Pentaho (business intelligence). The customer says, "I want something like that." He locates the Open Source version of the product, downloads it and is using it before the company is involved.
The sales cycle of a traditional enterprise vendor is just too long. It takes several months to get the right sales meetings, convince the CIO, sign a deal, do a pilot - maybe the customer spends a little money at this point but not much - evaluate it, follow it with a beta phase, and then hope for a real sale. That's one and a half years to get the deal. All along, the software vendor is convincing the customer to buy.
Back at the company that deployed the Open Source solution, the CIO is happy with the software. But after using it for a while, begins to wish for documentation, a live-person to ask questions, a phone number for support, and so on. At that point, the customer calls the company saying, "I've been using your product for a year and now I need your help."
This is a great sales situation. The user already considers the product mission critical to their business. No pilot is needed. The salesperson only needs to convince the user to become a paying customer - not convince them about the value of the technology.
This allows Open Source vendors to hire a different type of salesperson. At an enterprise vendor, the cost of a good sales rep is a minimum of $250,000 per year. If he or she is responsible for a $2.5 million quota, that salary alone is 10 percent of the vendor's revenue - a hefty chunk.
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