Salesforce (NYSE: CRM) deserves tremendous credit for what it's achieved in cloud computing since 1999. While it was a cloud pioneer back then, Salesforce just surpassed $10 billion in revenue in fiscal year 2018. It is now the largest pure-play cloud company, and it has a target on its back as the competition ramps up. Key to Salesforce's future success is how the company continues to attract and retain customers. The company laid claim to more than 150,000 global customers as of the end of the 2017 fiscal year. Here's a look at how Salesforce can continue to capture and keep its massive customer base.
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For starters, Salesforce provides a compelling value proposition for would-be customers. A typical customer is a large enterprise accustomed to spending significant sums on IT infrastructure and its accompanying maintenance costs.
From the perspective of the customer, Salesforce provides a means of taking some physical assets off its books and moving sales data to the cloud. As a result, the customer can be more nimble, benefit from Salesforce's analytics, and create a tighter feedback loop with its sales leads. Because the benefits here are pretty apparent -- less fixed investment in IT and a more effective revenue-generation tool -- the customer is typically hooked by Salesforce's sales platform initially, as opposed to one of its other cloud offerings like industry insights, commerce, or marketing. This is a classic move for a business like Salesforce, solving the most obvious pain point for a customer, with the intent of expanding on that relationship by cross-selling other services that provide additional value.
Salesforce's gateway customer relationship management (CRM) platform is not enough in and of itself to keep customers engaged. A CRM database, after all, is digital and easily transferable to a competitor like Oracle (NYSE: ORCL) or Microsoft (NASDAQ: MSFT) should the customer decide to move on. To truly create what investors call "high switching costs" for customers, Salesforce wants to build out deeper and wider relationships through data collection and cross-selling other services.First, Salesforce collects as much data as possible from the customer, organizes the data, and provides analytics based on its universe of data to create value for said customer. Second, Salesforce begins to integrate the customer into more of its ecosystem. A good analogy for this is accounting or personal finance software, like Intuit's (NASDAQ: INTU) QuickBooks or Mint products. Intuit, like Salesforce, invites customers into its ecosystem with one of these core products: QuickBooks for businesses and Mint for individuals. Each one solves an immediate financial management challenge for customers, and in return Intuit collects immense amounts of data. Then Intuit introduces customers to additional software to help manage their life finances. Before you know it, you can become reliant on Intuit products for all your personal financial management. This is no different from what Salesforce does for its corporate customers by providing sales expertise that can evolve into marketing, e-commerce, and so on through its entire ecosystem as shown below:
The end game? There isn't one.
A successful cross-sell for Salesforce further integrates its customers into its ecosystem of products. In the manner of any exceptional tech company -- think Apple (NASDAQ: AAPL) -- the more robust that ecosystem is, the more likely it is that customers are going to find it challenging to leave for a rival provider. The "stickiness" of a single cloud offering will be minimal over time. But the customer stickiness created by a multitude of value-creating cloud offerings has created a sustainable competitive advantage at Salesforce. At the fiscal year-end of 2018, Salesforce had four billion-dollar cloud services:
Expect Salesforce to have two primary aims in the years to come:
- Go deeper with customers by enhancing its existing cloud offerings through artificial intelligence and the Internet of Things
- Grow wider by leveraging its core cloud businesses to introduce additional offerings.
If it is effective with those two goals, the competition will be kept at bay, and investors will reap the rewards.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Isaac Pino, CPA owns shares of Microsoft. His clients may have positions in the stocks discussed. The Motley Fool owns shares of and recommends Apple and Intuit. The Motley Fool owns shares of Oracle and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short June 2018 $52 calls on Oracle, and long January 2020 $30 calls on Oracle. The Motley Fool recommends Salesforce.com. The Motley Fool has a disclosure policy.