Could Zoho outgrow Salesforce.com?

In less than two years' time, up-and-coming SaaS applications suite Zoho expects to have more users on its CRM application than current market leader Salesforce.com has on its flagship product. That was the confident prediction I heard from its CEO Sridhar Vembu when we met at the Office 2.0 conference in San Francisco last month.

The company's metrics lend some substance to this striking claim. Zoho already has over a million users in total of its portfolio of on-demand applications, and cross-adoption as users add extra applications has helped the CRM product scale up to 100,000 users so far.

Of course, it's easy for Zoho to add users in volume with its freemium model. Accounts with up to three CRM users get the application for free, and there are two paying editions for larger deployments. Zoho doesn't break out the ratio of free to paying users for any of its applications, but in my experience, the industry norm is for paying users to account for anything from 20 percent down to as little as three or four percent of the total (and less in some cases). So it may take a few more years before Zoho can catch up with Salesforce.com's billion-dollar turnover.

But Zoho is no fly-by-night startup. There are several reasons why Zoho really might live up to some of the hype we've been hearing recently.

Zoho is a platform. Although Zoho started out offering online Office applications, in particular its online word processor, spreadsheet and file sharing tools, its most pivotal application to date is Zoho Creator, an online database-driven application builder. Creator is the platform on which Zoho has created its own business applications and thus also acts as the tool with which users can tailor those applications to their own needs. Think of Creator as the glue that not only binds the Zoho suite together but also the source of stickiness that draws customers in. Vembu told me that 300,000 Zoho users have Creator accounts, which suggests that Zoho's most avid users are building or modifying their own custom applications to then roll out to other users within an organization. This week Zoho added a marketplace where an ecosystem of developers can exchange apps they've developed on the platform. That's the final ingredient in the platform story (compare AppExchange).

A lean cost profile. Zoho is the brainchild of parent company AdventNet, an established application developer and a substantial business in its own right. That parentage means Zoho has been able to grow to where it is now without venture funding or credit exposure. It's also been careful to control its costs, doing most of its development in Asia and keeping its marketing expenditure frugal, relying mainly on word-of-mouth and a few blogging champions (its own sponsored posts on TechMeme have done much for Zoho's visibility, along with the support of luminaries such as fellow Enterprise Irregular Zoli Erdos, who has recently launched a new blog site sponsored by Zoho called Cloud Avenue). That frugal approach will stand it in good stead as the current economic stormclouds lower overhead — as Vembu himself spelled out in a blog post last week on Surviving the Financial Crisis:

"Companies that have a strong balance sheet (we prefer zero debt), and the ability to adapt and flex will survive the wreckage. Customers are hurting, so attractive pricing is a must — there is going to be price deflation in tech. These are the rules we live by at AdventNet & Zoho."

A disruptive model? Just as Salesforce.com's CEO Marc Benioff dismisses conventional software vendors such as Oracle and SAP as dinosaurs on the verge of extinction, so Vembu looks on Salesforce.com's high-cost, premium-priced model (in comparison to Zoho's) as a throwback to the days of old-fashioned enterprise software. In my view there's room for both Salesforce.com and Zoho in the market, but by migrating upmarket to appeal to larger enterprises Salesforce.com has left the volume small business market open to attack by a lower-cost competitor like Zoho. Meanwhile, Zoho's decision not to turn to advertising as a source of revenue is also appropriate for the business market and a useful differentiator against Google, the other big player making headway in that mass SMB sector. On balance, Zoho's model offers enough value to an underserved market to qualify as disruptive and its state of preparedness for a difficult economic environment could well see it emerge the other side of the coming recession as a leading player.