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In almost every industry, new entrants are constantly facing an uphill climb to take market share away from established players. Companies entering the Software-as-a-Service (SaaS) space can count on having additional challenges, according to a new report by Tier1 Research.
Right now, there are more than 150 on-demand CRM providers, Tier1 discovered, a category that is viewed as a typical starting point for the SaaS space.
"A lot of these firms won't be around two to three years from now," Michael Mankowski, Tier1 senior analyst and author of the report, told CRM Buyer.
The companies will face the typical challenges any start up does, he added, stating, "Because their revenues are earned on a subscription model, it takes a while to break even on infrastructure and other investments."
For instance, "when you are selling licenses and maintenance contracts, you can win a few big-hitter contracts, such as a 50,000-seat deal," Mankowski explained.
Subscription vs. Contract
The subscription model, by contrast, doesn't lend itself to such large contracts, he noted. Rather, it is a slow and steady buildup of clients.
As an SaaS provider, "you might land a deal 
with 500 seats but because revenues are monthly, you won't break even until, say, six months down the road," Mankowski stated.
Also, the number of seats young SaaS companies land in any one deal tend to be small at the beginning, he said.
"In 1999, Salesforce.com's (NYSE: CRM) first customer had 10 seats," Mankowski claimed.
Plotting a Course
That hasn't stopped new companies from setting up shop. In order to be competitive, such companies rely on a range of strategies from targeting an industry niche or certain sized company, to building its own products on open source.
Visitar, a provider of customer interaction management software that launched last March, differentiates itself in a number of ways, Hank Barnes, the company's vice president of products and marketing , told CRM Buyer. These strategies include targeting the smallest companies, aggressively building out its reseller and VAR (value-added reseller) channel and pricing its product at the low end of the market.
"Right now we are pursuing small businesses with two or three people doing the sales . Eventually we will increase our focus to 100 plus but we will always be in the SMB market," he commented.
Also, its channel resellers can white label Visitar to better reach the local markets, Barnes continued. "The channel is a big part of our strategy," he said.
Currently, the firm has seven resellers selling the application with about half a dozen ready to come on board, Barnes noted. The firm has 500 users and Barnes hopes to have increased that number by a factor of ten or more by the end of the year.
A Focus on Costs
Visitar is also keeping its price point low -- US$55 per seat. Typically such applications -- whether they are on-premise or delivered on-demand -- are more expensive because of the computer-telephony piece and integration issues. Visitar, however, has been developed to avoid these additional costs, Barnes stated.
"We have built an application that acts like a site survey for users," he said.
Users answer a series of questions when setting up the application -- such as whether the service rep is to receive case information when a call comes in or not -- and then the company configures the back end appropriately.
FiveRuns, a provider of hosted systems management, focused on its own development costs to remain competitive.
"We have built a technology stack that is very cost effective because we used open source software," the firm's CEO Steven Smith told CRM Buyer.
At the same time, the company also invested heavily on the product's user interface. "We brought in graphical designers to structure the page navigation, workflow and so on. We took a cue from the Mac to build a crisp, intuitive and powerful interface," he stated.
In operation for one quarter, FiveRuns has acquired seven customers. "We've been pretty pleased with the traction thus far," Smith concluded.
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