The Untrodden Path from $20B to $100B
The Untrodden Path from $20B to $100B
Opportunities and obstacles for Salesforce to grow revenues and valuation by 5x
In the last article, Can Salesforce become a $1T company, we discussed the trajectory of enterprise software markets over time, and the trends of software eating multiple industries and horizontal functions.
In the final part of this series on Salesforce Flywheel, let me deep-dive into the specific opportunities and barriers for growth as Salesforce seeks to join the likes of Microsoft, Apple, and Alphabet as a broad-based, global tech company operating at a T scale.
Salesforce Opportunities for Growth
Let us first review the specific opportunities for Salesforce to expand its addressable market within application and infrastructure software.
Please note: These are sequenced based on my subjective assessments of the attractiveness of each opportunity and the likelihood of significant allocation of capital in terms of R&D and M&A. They do not include ongoing investments or market share consolidation deals in sales, service, marketing, commerce, analytics, and integration areas, which constitute the bulk of the revenue today.
#1: Industry Clouds
From my essay on industry clouds in 2016,
"In contrast to horizontal application software focused on productivity and enablement, industry software typically covers mission-critical, transactional processes related to how customers engage with the very core of the product or service offered by the firm. They are the systems of record holding all product, asset, transaction and customer data. They are also the systems of engagement that enable mission critical transactions between the company, its sales ecosystem, and its customers. In verticals like banking, insurance, telecom, utilities and retail, industry-specific application software spend exceeds horizontal application software by more than 10:1…
…watch out for the emergence of new industry cloud companies over the next few years. They are likely to redistribute billions of dollars in customer spend from old industry software companies to new SaaS players, create new market caps worth tens of billions of dollars in the aggregate, and lead to several attractive investment and M&A opportunities in both private and public markets.”
There can be little doubt that industry clouds represent the next wave of growth for Salesforce. With its acquisition of Vlocity earlier this year, Salesforce now has 12 industry cloud offerings, and possibly several more in the next few years.
It is one thing to create vertical-specific veneers of horizontal applications; another to offer deep industry capabilities: consider for example, rating & billing in telecommunications, ad-sales and traffic management for broadcasters, smart metering in utilities, or promotion management in consumer goods. Most of these domains are still dominated by on-premise vendors, and the opportunity to transition customers to modern cloud-based software is very real.
To provide a “whole solution” for an industry will require a combination of organic development, M&A, a vibrant ISV ecosystem building on the Salesforce platform for the industry, and industry-specific connectors that decrease time to value.
Expect to see significantly higher levels of industry-specific app development on the Salesforce platform in the next few years. ISV innovation on industry apps will a) deliver more complete solutions for the customer on the same platform, b) generate additional revenues for Salesforce, and c) build a qualified M&A pipeline.
And of course, industry solutions are mission-critical, incredibly sticky, and proven to enjoy far lower costs of acquisition; industry communities are close-knit so rapid growth by word-of-mouth is a welcome consequence.
In Life Sciences and Banking, both Veeva ($30+B valuation) and nCino ($8+B valuation) —built on the Salesforce platform— have become leading industry clouds in their own right. While Salesforce does not publish its industry product revenues separately, expect substantial growth over the next few years with a higher pull-through of horizontal products. It is conceivable that several of Salesforce’s industry clouds could be generating $1B+ annual revenues each in the next 5-10 years.
Read Vinnie Mirchandani’s great take on the Salesforce Industry Summit to go down this rabbit hole.
#2: The Digital Transformation of Work: Intra and Inter Enterprise Collaboration
With increased remote work, a) virtual conferencing software, b) instant messaging, and c) collaborative content management are converging. Enterprises also want to use these tools to communicate and collaborate beyond the firewall with suppliers, partners, and customers, without compromising on security.
Microsoft is of course the unquestioned leader here with the highest market share and the most integrated product suite (Teams), but Slack, Box, Atlassian, Asana, and others are growing too.
This may look like a sideward move for Salesforce and on to ultra-competitive turfs, but it is a natural evolution into how companies are digitally transforming how they do work and where budgets are being re-directed.
#3: Machine Learning / Artificial Intelligence
AI agents are exploding across industries and functions for a wide range of use cases (See a more detailed discussion here). We are at early stages still in terms of market development, but explosive growth is a given as enterprises strive to make sense of data, generate insights, convert them into actions, and deliver measurably better outcomes.
Salesforce already has a AI offering (Einstein), but expect this area to get increased investments both in terms of organic development and M&A.
Currently, Einstein can be purchased as a platform service that can be used in any application, or as a specific add-on to a cloud.
Examples of platform services include:
Einstein Vision and Language - $4000/month for 1 million predictions/month
Einstein Predictions - $75/user/month for custom predictions on any object
Examples of add-on modules for specific clouds are:
Sales Cloud Einstein - $50/user/month
Service Cloud Einstein - $50/user/month
Einstein Bots - $50 /100 conversations per month
Salesforce does not split out specific revenue #s for Einstein, and current uptake metrics are unclear. The Salesforce marketing machine was and is still likely ahead of product, but capabilities are catching up fast. As intelligence becomes the key differentiator for improving enterprise business processes, expect increased refinement of these offerings leading to higher levels of adoption and revenue.
#4: Customer Data Monetization
In most industries, customer data is now a strategic asset with immense potential.
A rich store of customer data is the foundation that serves as the basis for: a) prospect and customer personalization that delivers better conversion and engagement, b) providing closed loop feedback to product development, marketing, supply chain, and operations, and c) delivering “Consumer Insights as a Service” for consumption by upstream partners.
Examples for (c) include:
Retailers aggregating consumer insights for CPGs
Cable/satellite companies aggregating census-based viewer insights for Advertisers
Hospitals and Clinics aggregating anonymized healthcare data for Life Sciences, Health Insurance, and Employers
Automotive OEMs & their dealer ecosystems aggregating data for suppliers
This is an area of increased enterprise interest, that goes beyond traditional data analytics and CRMs into “Customer Data Platforms” (CDP). There is a significant opportunity for cross-functional intelligent CDPs that a) aggregate and cleanse customer data across all touch points to build a high quality repository, b) provide insights on-demand through real-time APIs or in batch to directly impact CX, c) allow for partners to consume data and insights through interactive data services, and d) address industry-specific needs with specialized connectors and data models.
The recent acquisition of Evergage is interesting, but the current footprint is small. This market need is being mostly addressed by custom IT services (or) embedded digital subsidiaries. 8451 and HEB digital are great examples in Retail. But there is considerable evidence of customer intent to buy than build, translating to new opportunities for modern software-as-a-service companies like Salesforce.
#5: Platform as a Service
#5a: PaaS for ISVs
Salesforce has the largest ISV ecosystem; its platform is attracting the best enterprise developers. Veeva —that utilizes Salesforce PaaS—is contracted to spend a minimum of $50M a year until 2025 ($500M minimum over a 10 year term). Veeva will likely spend a lot more given its explosive growth.
As products built on Salesforce PaaS become large multi-billion dollar companies —Salesforce gets 15-25% of ISV’s revenues— expect this revenue stream to grow multi-fold. To support these ISVs, Salesforce platform capabilities will need to expand to maintain parity with PaaS features of AWS, Azure, and GCP. Two big trends to watch: a) Salesforce decisions on buy vs. build vs. hyperscaler partnerships for new PaaS capabilities, and b) the extent to which it adopts hyperscalers for IaaS relative to its own data centers.
#5b: PaaS for Enterprises
There is growing demand for LCAP (Low code Application Development Platforms) for small and medium enterprises to plan, organize, and track “stuff” at work, including configuring custom-apps without writing any code. This is the opportunity currently being addressed by companies like Airtable and Monday.com.
On the other hand, large enterprises are hungry for platform infrastructure to create better intra and inter enterprise workflows and experiences. This is the MXDP (Multi Experience Development Platform) opportunity where Outsystems, Mendix, etc. compete in addition to Salesforce.
Salesforce is already a leader in both LCAP and MXDP but its presence is mostly a consequence of its large installed base for applications. A more direct go-to-market targeted at IT teams and custom app developers could result in significant uptake and adoption within large enterprises.
The SMB opportunity will require a very different bottoms-up, self-serve model that includes templates and pre-configurations for common custom apps; it remains to be seen if this is an interesting enough opportunity for an enterprise-oriented company.
And of course, no user enjoys logging in and entering data into Salesforce; minimizing the friction by re-imagining the UX through voice, search, and messaging will unlock massive productivity gains. As proven by success of companies like Clari, there is great demand for things that make CRM invisible; providing these new interaction services as pluggable components for integrators, ISVs, and enterprises to compose applications will make adoption easier.
#6: IT Management
With the steep growth in digital transformation investments, enterprises have a critical need to manage physical and virtual IT assets, run IT operations, and expeditiously resolve service requests and outages.
Salesforce does not have a meaningful presence in CIO/CTO organizations. The likes of Service Now, BMC, and HP dominate this space.
This is not a niche market. With $60+B in TAM, it can also provide a gateway into operations/service management across the enterprise.
#7: Talent Management /Employee Engagement/ HR
This has been a key frontier in the cloud wars among Oracle, Workday, and SAP.
The HR-Tech domain is no longer administrative or payroll centric; visionary companies see it as a core part of cultivating a sustainable competitive advantage through proactive employee training and engagement. It continues to see substantive interest and growth ($23+B spend in 2020, acc. to Workday).
Salesforce does sell Trailhead as a training offering on the edges of this segment, but making a direct play for HR is a different cup of tea; HR buying personnel and dynamics are very different from CRM or Platform. Building a business at scale will likely need a transformational M&A of a next gen HR SaaS company.
#8: Project and Portfolio Management
PPM is an active and vibrant market with multiple SaaS players —including some built on the Salesforce platform like Financial Force.
It is a relatively smaller market ($5B, 2020) but growing at ~13+%, touching customer relationships at their very core, and mission-critical to professional service firms.
#9: Back-Office / Cost Domains
B2B Spending is in the trillions; investments in cloud software to manage procurement, supplier invoices, expenses, and payments have been on the up-tick.
Business Spend Management / Financials / ERP are large markets representing serious spend and the cloud transitions are accelerating.
Yet, managing suppliers, money, and manufacturing are the inverse of what Salesforce does; the buying centers are different, and these sectors are dominated by the likes of Workday, Coupa, and SAP. Over the longer term, Salesforce might consider entering some of these sectors through M&A, but in the short-to-medium term, any serious foray is unlikely. The app ecosystem does have offerings in some of these areas but adoption is very limited.
#10: Developing Markets
Over the last decade, companies like Zoho, Fresh Desk, Chargebee, etc. have provided comparable SaaS capabilities at affordable price points. These solutions have resonated both with developing market customers, and smaller enterprises in developed markets who may not want the bells and whistles of a Salesforce, Workday, or Zen Desk.
Salesforce low-end editions are still expensive and do not meet the needs of customers who expect more for less. Should Salesforce seek to play at the low-end of the market when there is so much gold to get on the enterprise end is a good question to ponder. Nevertheless, the markets in Africa, India, SE Asia, and Latin America are massive and cannot be dismissed without due consideration. Many of these SaaS firms are also aspiring Salesforce disrupters with far lower cost structures, and may threaten the company’s business model in at least some enterprise segments over the long-term.
Salesforce Obstacles to Growth
Fragmentation is Orthogonal to the Brand’s Value Proposition.
Salesforce believes it is unlike SAP or Oracle because its products hang together on a coherent PaaS framework. They are accessible through a common platform (for the most part).
With more large acquisitions, there is the risk of becoming an aggregator of products with proprietary code bases that do not talk to each other. If the platform coherence is lost, Salesforce runs the risk of becoming the very thing it despises.
Expanding Outside CX
Few thought Salesforce could hit $1B in revenues, let alone $10B and now $20B. An under-appreciated secret to its success is its undiluted focus on front-office. Even as its largest competitors’ product portfolios span the spectrum from Manufacturing to Spend Management to CRM to Databases, Salesforce has been laser-focused on what it does best: helping enterprises deliver better customer experiences. Can it continue to execute as well if it chooses to diversify widely?
Scaling Culture
There are strong reasons to believe this company was built to last and scale. Still, preserving the culture is likely the biggest constraint as the company seeks to double revenues and employees another two times over the next 4-8 years.
Growth vs. Profitability
There is no precedent of SaaS companies growing at this pace at this scale. We are in un-chartered waters as it relates to trade-offs of EBITDA vs. growth. Apple, Alphabet, and Microsoft were hugely profitable businesses and enjoyed robust balance sheets as they trekked from $20B to $100B. Can Salesforce meet market expectations of profitability while continuing to invest in growth (or) can it effectively reset profitability expectations? $CRM stock is the prime currency for M&A, and employee compensation; the ability to preserve and grow the valuation in line with expectations is critical for continued expansion.
Disruption and Competitive Dynamics
Salesforce was an upstart in the 2000s. Now it is the gorilla and incumbent. As spectacular as its growth might have been, SaaS is now default, and there are many upstarts looking to disrupt Salesforce. Nothing is forever and no-one can take customers for granted. Alternatives that transform customer economics relative to the new status quo can find ways to succeed and dampen Salesforce’s trajectory. Larger competitors —like Adobe, Microsoft, and C3—are forming alliances to offer more choices, and some of these initiatives can hurt the company’s momentum.
Salesforce is a once-in-a-generation company that is redefining enterprise software. Yes, the path ahead from $20B to $100B is unpaved, unmarked, and untrodden. But past is prologue; there is much to learn from what has transpired over the last two decades that should inspire confidence and hope. As more functions and industries are subsumed by software— both in terms of core and contextual product experiences— the underlying market demand for Salesforce’s brand and its offerings appears incredibly robust.
Feel free to write comments and thoughts to ajblogs@protonmail.com or below.