On-demand pricing: the only way is up

SAP's on-demand suite Business ByDesign is more evidence of the growing thirst for hosted applications, but some analysts warn there is a catch to variable pricing: the only way is up.
Written by Liam Tung, Contributing Writer

SAP's on-demand suite Business ByDesign is more evidence of the growing thirst for hosted applications, but some analysts warn there is a catch to variable pricing: the only way is up.

Following the tune hammered out by Salesforce.com over the past years, SAP is now touting lower costs as a key pillar of the appeal of on-demand applications for businesses that don't need deep customisation.

"In on-demand, there are no maintenance or hardware and infrastructure costs -- all those costs are included," SAP's Business ByDesign evangelist, John Goldrick, told ZDNet Australia.

According to SAP research, there are three to four thousand customers in Australia potentially ripe for its on-demand applications. Salesforce.com meanwhile has acquired over 1,000 Australian customers to date, mostly in the small-to-medium business sector.

SAP will charge US$149 per user per month to access Business ByDesign, while "low touch users" will be charged at US$220 per month for groups of five.

The lower-cost pitch by vendors might chime with customers keen to save a buck, however, Hydrasight analyst John Brand has warned that on-demand pricing is always tilted towards future increasing demand for the application.

"If your demand levels change downwards it becomes a far less attractive option. Pricing is based on increasing customer demand over time -- that's the premise. So the vendors do make it very unattractive for users to decrease their usage in a particular application," Brand told ZDNet Australia.

However, IBRS analyst Rob Mackinnon said on-demand applications can be particularly valuable for start-ups and application-hungry environments.

"It's good when there is demand for a new application and you want it up and running quickly," he said.

Mackinnon added customers also need to consider the fact that their information is under the management of a third-party, citing concerns generated as a result of major outages experienced by Salesforce.com in late 2005.

Salesforce.com's customers share servers, which means that if one server is down, it can put many clients out of action, he said.

Since the 2005 outage, Salesforce.com has launched "Trust.salesforce.com", a Web site that offers customers a view of the status of its datacentres around the world.

I want it all

Where SAP differs from Oracle and Salesforce.com, according to SAP's Goldrick, is the breadth of its on-demand applications.

"We can, from our CRM component, create a sales order in one click, which looks at the manufacturing cycle and can tell you the profitability of that order, as well as the logistics and inventory cost," he said. By contrast, Oracle and Salesforce.com are point solutions, said Goldrick.

It's a state of play that might soon see change. Salesforce.com is attempting to broaden its suite of applications and last week launched Force.com, a service designed for businesses to host all their applications on Salesforce.com's servers.

Despite having over 700 applications developed via its AppExchange program, said Salesforce.com CEO Marc Benioff, 90 percent of customers think Salesforce.com only offers CRM software.

IBRS analyst Mackinnon said that while Oracle's pitch is having an on-demand version for every on-premise -- ie not hosted -- application they have, but their success has so-far been limited to CRM.

"Siebel had their act together in terms of CRM on-demand, which has been strengthened by Oracle since they took over. But Oracle's pitch is that they provide a wide depth and breadth other than CRM. Every single piece of software they have has an on-demand story but I'm not sure about traction in a market other than CRM," he told ZDNet Australia.

As for SAP's on-demand suite of applications, Hydrasight's Brand said: "It's nothing new than repackaging something that wasn't working."

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