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Weekly Review: ASPs Aim for Sweet Spot By Phil Wainewright October 22, 2002 Where is the sweet spot for application services? When ASPs first hit the market in the late 1990s, the conventional wisdom was that they would deliver easily digestible packaged versions of big-company software suites to smaller enterprises. Unfortunately, this turned out to be wishful thinking by the software vendors, who were eager to drum up new revenues. Their strategy of selling an inferior version of their software to what they saw as an inferior tier of companies was as flawed as it was patronizing, and it fell flat on its face. Read and React "Now that Web-native ASPs have begun to break through in the mid-tier, how long will it be before they challenge the top end of the market? " Give us your feedback in the ASPnews Discussion Forum Time and again, ASPs ran into a brick wall when they tried to target the mid-tier of small and mid-sized companies. These were enterprises with aspirations. They didn't want somebody else running a cut-down version of SAP or Peoplesoft or Siebel on their behalf — they wanted to do it themselves. ASPs discovered that the only customers they could recruit were either very large companies that wanted to outsource existing applications, or very small companies for whom the ASP route was the only viable means of affording top-tier enterprise software packages (in today's tougher economic climes, there are few startups left who can afford to be so lavishly label-conscious when choosing their software, even from an ASP). Changes in Attitudes Among those mid-tier companies, there has been a big change in attitudes three years on. An increasing number have decided they do, after all, want someone else running their business software for them. They've also started to turn against the established big-name brands, in favor of software that's built from the ground up for delivery via the Internet. NetLedger's decision last week to bring out new versions of its software and target companies with up to 500 employees is perfectly timed to capture this emerging mood (see NetLedger Aims for Suite Success). When NetLedger launched in August 1999, its headline-grabbing proposition was online accounting software that cost a small business just $5 a month (see Debut by $5-a-month accounts app). Those low-cost, first-generation, cookie-cutter solutions failed to set the market alight, and in the intervening years NetLedger has not only extended its offering into a complete business suite, but has also added significant self-service customization capabilities to enable customers to tailor the software to their precise needs. You can judge for yourself just how much NetLedger has added to its original proposition by looking at today's price tag — what started out as a $60-a-year small business accounts package has morphed into a $45,000-a-year enterprise suite (with a less costly three-user version starting at an annual fee of $4,800). Web-native ASPs Break Through NetLedger is far from alone in pitching its offering around the middling five figures — the $25,000 to $75,000 a year price band seems to be the ballpark that mid-tier companies expect to pay for enterprise-class, Web-native application services from the likes of Salesforce.com, OpenAir, Outtask or UpShot. As customers, they've recognized they'll get an effective, reliable application that covers most of their needs and which is constantly adding extra features, delivered in a relationship where both they and the vendor know they can walk off to another provider any time they feel they're no longer getting value for money. Now that Web-native ASPs have begun to break through in the mid-tier, how long will it be before they challenge the top end of the market? I happened to speaking on the phone yesterday with Jim Howard, CEO of up-and-coming content management provider CrownPeak Technology, so I put that question to him. "Where we come in at one tenth of the price — fully implemented — of [a traditional enterprise-class solution], we're having a credibility problem with the pricing," he told me. "We're pricing it at the level we believe it should be," he said, but it's too far below what these larger enterprises are used to paying for them to make that leap of confidence just yet. Remember, though, that three years ago, enterprise ASPs like USinternetworking and Corio were offering top-tier software on contracts that typically cost in the mid-six-figures per year — $300,000 to $700,000. The success those companies sought among mid-tier companies is now being reaped by software services providers whose solutions cost a tenth of the price. I wonder how long will it be before sentiment switches at the high end of the market, too. Overnight, it won't be the lower of the two price deltas that attracts suspicion. The credibility problem will rest with software vendors that are still asking ten times as much as software-as-a-service providers for an equivalent solution. Do you have a comment or question about this article or the ASP industry in general? Speak out in the ASP Discussion Forum.