I’ll say one thing for SugarCRM, they certainly have generated a lot of buzz. I don’t know anyone actually using their system, but there are a lot of people talking about them. Now the question is whether they can turn buzz into commercial success.
One thing the company has going for it is its choice of markets. Since Low Price x Low Quantity is not a recipe for success, the key for Sugar, and all Open Source companies, is volume, volume, volume. Like Open Source success stories RedHat and JBoss, Sugar is playing in a market with enormous opportunity. At an average of $350 per user per year and 20 users per customer (Salesforce.com’s average), the company will reach the IPO escape velocity as it closes in on 10,000 customers. Since the number of potential businesses that can use CRM is measured in the millions, that certainly seems possible.
However, one key difference for Sugar vs. other Open Source successes is its competition. From our interviews with Open Source users, the vast majority are attracted to Open Source because of price. Linux/RedHat was able to offer Unix functionality at lower than Microsoft prices – something Sun, IBM, and HP couldn’t match. JBoss could comfortably undercut BEA and IBM without fear that those companies would respond with price cuts of their own. Their cost structures couldn’t support it.
To be sure, Sugar is underpricing Salesforce.com – $40 per year list price for an OnDemand user vs. $65 for Salesforce.com. However, even if that relatively small price differential is enough to sway people to choose a company other than the market leader, it isn’t clear that it is sustainable. A quick look at Salesforce.com’s income statement shows a company with 10% net profits. For Sugar to be break even at a price 39% lower than Salesforce.com’s, the company would need to have much lower cost structure. Given that Salesforce.com is already lean and mean, I’m not sure how that is possible.
That leaves Sugar with precious little to differentiate their business.
- Alternative Delivery Methods: Sugar offers an installed version and an appliance. The success of Salesforce.com has already shown that the market has voted against installed. As for appliance, if it really takes off, expect Salesforce.com to follow suit.
- Code Customization: This is a relatively small segment of the market. Few Open Source users ever touch the code.
Ultimately, the biggest argument for their success is that they can be the AMD to Salesforce.com’s Intel, the Sybase to their Oracle – a distant number two who does reasonably well simply because the market is so big. In the meantime, don’t sell your Salesforce.com stock.