PeopleSoft Slashes Hosted Service Costs

Although PeopleSoft reduced prices on its application hosting service last November, the company has said it plans to cut the cost of the service again, this time by 20 to 30 percent.

The new lower-cost option, aimed at mid-size businesses, will let companies license PeopleSoft's applications as usual, with an additional monthly fee for hardware, software, staff and facilities.

This move should make the company more attractive to its target market, Yankee Group analyst Sheryl Kingstone told CRM Buyer. "In the hosted market, it's not really about the features right now," she noted. "People are saying, 'Just give me the solution, and give it to me at a cheap price.'"

All About the Benjamins

Although companies that rely on hosted services do care about the quality of hardware, support and data center facilities, Kingstone added, right now they are focused predominantly on price.

"If you're even just a little more expensive than competitors, you could be pricing yourself out of the market," she said.

For example, Kingstone noted, if a company had considered PeopleSoft before the most recent price reduction and had found the costs too high, it likely would have turned to another vendor, such as Salesforce.com (NYSE: CRM) or Siebel.

First-Mover Advantage

As more companies ponder whether to go with a hosted service, whoever signs up the most users first could be the winner.

"Once you get them on your system and they're addicted to your service, it's very viral," Kingstone said.

As a result, hosted service companies like PeopleSoft are making an aggressive push right now toward wider adoption, and tactics like price slashing could help them win more customers.

"Everyone is rushing to get that first hosted customer," Kingstone said. "After that they can focus on retention, which is much easier to do."

In order to move closer to success , PeopleSoft should not make its offering into a massive managed service package, Kingstone added. She said that by adopting a model more like Salesforce.com's and keeping close to that company's prices, PeopleSoft will be a more formidable competitor.

Lively Market

PeopleSoft's price-cutting move also comes at a time when hosted software is becoming a more compelling option for many companies. A recent Aberdeen Group report noted that in terms of CRM products, 35 percent of respondents said they already used hosted solutions, and 85 percent said they would consider hosted services when shopping for new strategies.

Oracle (Nasdaq: ORCL) recently announced success in the hosting market, noting that its second-quarter application hosting revenue grew 82 percent from the previous year. The company also said it plans to boost its profits in the area to US$1 billion by 2006.

Siebel also has high hopes for a rosy future in hosting since its recent acquisition of CRM vendor UpShot and partnership with IBM (NYSE: IBM). CEO Tom Siebel has noted that the new programs could account for up to 15 percent of the company's sales in the future.

Year for Hosting

For his part, Aberdeen Group analyst Denis Pombriant told CRM Buyer that hosted software is a disruptive innovation -- and as a result, its popularity should grow.

"It's a means of delivering a product that's an order of magnitude less expensive," he said. "It's also easy to implement and use and takes a great deal of risk out of what was a risky proposition."

Because of the model's growing acceptance and benefits, Pombriant said he believes action will be lively in the space this year as PeopleSoft and other major players work to capture the hosted market.

"PeopleSoft is making some strong plays, but they'll have some serious competition," he said.