Sugar CRM reduces prices across the board, looking for broad adoption

As I said on my personal weblog yesterday:A day rarely passes that I don’t see another pricing adjustment in the saas world.Today it is SugarCRM that is taking the knife to prices, bringing the cost of a 5 user 'Express' system hosted in the internet cloud to $499 per annum and a 10 user system down to $799 per annum.
Written by Dennis Howlett, Contributor

As I said on my personal weblog yesterday:

A day rarely passes that I don’t see another pricing adjustment in the saas world.

Today it is SugarCRM that is taking the knife to prices, bringing the cost of a 5 user 'Express' system hosted in the internet cloud to $499 per annum and a 10 user system down to $799 per annum. The highest price a user will pay for the enterprise edition is pegged at $600 per annum or $50 per month.

Observers will draw comparisons with Salesforce.com but that's not quite how it works. In large scale deals it is possible to negotiate Salesforce.com down to similar levels as Sugar but then when you look at Salesforce.com's price book, things get rather more complicated with some add-ons included and others requiring additional fees.

With Sugar Express, the company seems to be taking at least some of the price fight directly to Salesforce.com. Apart from basic CRM capability it is including plug-ins and connectors for Microsoft Outlook, allows access to the customization engine along with cloud connectors for services like Facebook and Hoovers. Taken together, this is similar to Salesforce.com's AppExchange idea but not quite the same as the Force.com application builder platform. "In on-demand, you're not making code level changes but enhancing the application but then I accept there are only a certain number of things you can do using the existing core," said Martin Schneider, Sugar's director of product marketing. The question has to be whether the combination of price and function are enough to get SugarCRM into the bigger league of players.

As a commercial open source provider, Sugar has attracted many users, but few are paying. According to the company, the user analysis breaks out as follows:

Free edition

400,000 users

50,000 systems

Commercial customers

100,000 users

5,000 systems

The bare user count numbers are impressive, given that Sugar has only been going some five years but as Vinnnie Mirchandani told me: "They're tiny." In other words, their revenues simply don't get them on the radar in the big deals, leaving the likes of Salesforce.com and NetSuite a clear field. This is not necessarily an incumbrance. Schenider maintains the company has barely touched the last round of $20 million it raised so at the cash flow level, it is living within its means. As an indication of its confidence, Sugar plans to open data centers in Munich, Germany sometime on the Q3 2009 timeframe and another in Asia Pacific, slated for Q1 2010.

At the entry SMB level, the company sees the potential to grow into millions of users, especially in a recessionary economy. "When the economy tanked, downloads went from 30-40,000 per month up to 60-70,000. We see no sign of that letting up," said Schneider.

Sugar can build a healthy business on its commercial open source model. Even if the conversion rate to payers remains at the 10% level it has the benefit of attracting a large community of committers plus an ecosystem of commerical developers who can take the product forward relatively quickly. It doesn't have to argue about pricing at the SMB level so need not worry about the larger players undercutting them provided it keeps ahead of the value curve. Its ability to manage costs is helped by having the open source community kudos behind it.

The kicker for me was discovering that Sugar can provision and manage 2,500 to 3,000 users per blade for around $80,000 per annum. That's around $2.22 to $2.66 per user for a tenancy model that is not so different from SAP's ByDesign which is hampered by cost problems. What does Sugar know that SAP doesn't?

Whether this combination of price/value/community allows the company to overcome open source objections on issues like security and code ownership from larger enterprises remains to be seen. Despite the obvious attractions of 'free' software in this economy and support from analysts arguing that open source adoption is much higher than is generally supposed, there isn't much solid evidence that open source has moved out of infrastructure into business applications. That may no longer be true. At a recent OpenBravo conference, Matt Asay reeled off a stack of stats indicating that core applications such as ERP are enjoying adoption rates of around 22% with predictions going as high as 60% for 2010.

As we've seen in the past, recessions bring all sorts of invention. If Sugar has got this right then it could become a serious economic competitor. It's got the platform, a respectable number of customers and users. It will be factors outside its control and especially the erosion of open source prejudice in the CIO's office that determines whether it (and other open source applications) succeeds in the enterprise.

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