WHITE PAPER

The Enterprise App Economy: How App Marketplaces are
Changing the Way Vendors Market and Customers Shop
Spons...
large companies (e.g., over 1,000 employees). Extensive reviews of the Salesforce AppExchange
marketplace as well as appli...
Why Application Marketplaces?
Application marketplaces are increasingly becoming the go-to choice for business buyers beca...
How AppExchange Works
AppExchange is built on the Salesforce Platform. One of the reasons it works well is that
salesforce...
Successful Vendors on the AppExchange
What are software vendors doing to drive success through AppExchange? First, it is i...
Leverage the free trials to give prospective customers access to demo data in a production
environment. ISVs report that
t...
Consider carefully the market potential of the platform and the time to market to build an application on
that platform. F...
About IDC
International Data Corporation (IDC) is the premier global provider of market intelligence, advisory
services, a...
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The Enterprise App Economy: How App Marketplaces are Changing the Way Vendors Market and Customers Shop by IDC

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IDC Whitepaper
"The Salesforce AppExchange, launched in 2006, continues to be, in IDC's opinion, one of the leading marketplaces for enterprise applications in the software industry. Other marketplaces — both vendor/platform specific and independent — exist, but AppExchange, like Apple's App Store, remains the industry standard against which they are measured."

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The Enterprise App Economy: How App Marketplaces are Changing the Way Vendors Market and Customers Shop by IDC

  1. 1. WHITE PAPER The Enterprise App Economy: How App Marketplaces are Changing the Way Vendors Market and Customers Shop Sponsored by: salesforce.com Christine Dover November 2013 IDC OPINION The consumerization of IT is dramatically changing the way software vendors market and business users buy applications. Just as consumers have become accustomed to using Web sites, ratings, reviews, and social networks to research what they are thinking about purchasing and then buying that product or service through an app store, business users are going through a similar transition when looking for enterprise applications. Independent software vendors (ISVs) that are not listing their products or engaging in the customer activity that is occurring on application marketplaces are missing out on sales opportunities. Prospective customers, who are familiar with salesforce.com and generally prefer cloud-based applications, are starting their search for new applications on enterprise application marketplaces such as the Salesforce AppExchange. Key findings of this research include:  C-level and IT executives are demanding cloud applications as they look long term to source their IT needs.  More than 50% of business application purchases now start with online research and perusal of ratings and reviews from other users.  The AppExchange economy is booming. It took about five years, from the launch in 2006 to September 2011, for AppExchange to reach the 1 million installs milestone and only another two years to more than double that number. Potential customers are installing, on average, over 2,000 apps per day; 46,250 apps per month; and 520,000 apps per year.  Many ISVs on AppExchange report conversion rates for installs to qualified opportunities in the double digits, ranging from 17% to 71%. The conversion rates for qualified opportunities to closed deals are also in the double digits, ranging from 10% to 25%.  AppExchange partners have generated over $1 billion in revenue for their own businesses to date. METHODOLOGY This white paper was developed through a series of telephone interviews conducted with more than 10 salesforce.com partners. The partners develop both horizontal applications (e.g., financials, human resources, calendaring, and data integration) and vertical applications (e.g., professional services, high technology). The partners range in size from small companies (e.g., fewer than 10 employees) to November 2013, IDC #244254
  2. 2. large companies (e.g., over 1,000 employees). Extensive reviews of the Salesforce AppExchange marketplace as well as application marketplaces of other software vendors and independent third parties were conducted. IN THIS WHITE PAPER This white paper discusses the enterprise application economy in general and how marketing and purchasing processes are changing, with the Salesforce AppExchange as the featured example. THE ENTERPRISE APP ECONOMY C-level and IT executives are demanding cloud applications as they look long term to source their IT needs. According to IDC's 2013 CloudTrack Survey of 1,109 C-level and IT executives:  83% agree or agree strongly that their organization views public cloud as a long-term platform strategy for sourcing IT needs.  64% agree or agree strongly that they are willing to do business with small and very small cloud services firms if they have an innovative offering.  28% say they look first for cloud and 66% say they look also for cloud when their organization is looking for net-new IT services.  35% say they look first for cloud and 57% say they look also for cloud when their organization is looking to replace existing IT functionality. How Software Marketing and Buying Processes Are Changing The consumerization of IT is dramatically changing the way software vendors market and business users buy applications. Just as consumers have become accustomed to using Web sites, ratings, reviews, and social networks to research what they are thinking about purchasing and then buying that product or service through an app store, business users are going through a similar transition when looking for enterprise applications. The days of building an extensive request for proposal (RFP) detailing an organization's requirements for a business solution and then asking any and all vendors to choose to participate and present their solution (often a lengthy and expensive process involving thirdparty consultants) are mostly in the past. Instead, business users are often doing their own research and selecting a few vendors that they believe can meet their business needs, perhaps conducting a free trial using the application and moving quickly to a purchase decision. To do this up-front research, business buyers are increasingly looking for enterprise application marketplaces that look and behave like the consumer sites they are used to using to select restaurants, buy reading materials, and book vacations. For its part, the application software industry is responding with easy-to-use sites that offer a curated presentation of applications, user ratings and reviews, free trials, and more. ©2013 IDC #244254 2
  3. 3. Why Application Marketplaces? Application marketplaces are increasingly becoming the go-to choice for business buyers because they are generally easy to use and provide a wealth of information that makes it easy for buyers to compare and contrast a variety of applications that meet their requirements. It is important that there be a significant number of applications available for a wide cross-section of business needs. A marketplace with few applications will not offer enough variety from which customers can choose. It is like opening a store with an attractive window display but empty shelves inside; a customer may enter the store once but probably won't return. It needs to be easy to search for applications and be presented with specific applications that match the search terms. Further, it is important to be able to engage with the selected application through online demos, availability of free trials, and a clear process to acquire the application. Successful application marketplaces are doing all of these things. And business users are responding. Research from various firms, including IDC, shows that more than 50% of business application purchases now start with online research and perusal of ratings and reviews from other users. Increasingly, business users move through the purchase process on their own or with minimal assistance from the software vendor by viewing demos, talking to other users who previously contributed reviews, accessing a free trial, and then starting the purchase process. Buyers feel and are more in control of the sales process, choosing when they want to engage. SALESFORCE.COM'S APPEXCHANGE Why the AppExchange? When the Salesforce AppExchange was launched in 2006, it was a leap forward in how software vendors presented applications built by their ISV partners. Until then, and for a number of years later, most companies provided simple listings or directories of partner applications and services. AppExchange was different, looking much more like a marketplace than a directory listing. Soon after, Apple introduced its App Store, and a new paradigm for researching and buying applications was launched. AppExchange is a vendor-specific application marketplace. This means that all of the applications are associated with salesforce.com, are built natively on Force.com, or have a standard integration with the salesforce.com cloud applications. Salesforce.com markets the AppExchange to employees, customers, prospective customers, and partners as the place to look for salesforce.com-compatible applications. And go there they do. Many salesforce.com customers "As a native app, our favorite place to sell is on the Salesforce offer stories about needing a AppExchange. The majority of our leads are from salesforce.com new app to manage customers or those seriously considering salesforce.com. The leads are inventory, for example, and high quality and steady, with spikes during Dreamforce, Cloudforce, and someone says "Let's see other events and campaigns." — CEO, FinancialForce.com what's on AppExchange," often bringing it up in a browser during a planning meeting. ©2013 IDC #244254 3
  4. 4. How AppExchange Works AppExchange is built on the Salesforce Platform. One of the reasons it works well is that salesforce.com manages it as a product, the same as Sales Cloud, Service Cloud, and other salesforce.com applications. This is an important distinction because it means that salesforce.com has a team of product management, marketing, and development professionals dedicated to the success of AppExchange and, more importantly, to the success of the partners who are marketing their applications on AppExchange. Salesforce.com promotes AppExchange to its customers, which in turns drives traffic to the site. Salesforce.com users tend to look at AppExchange first when they are looking for software because it is right there when they are logged in to the app, resulting in more qualified buyers who are looking for cloud-based applications. Since its launch in 2006, AppExchange has been revised a couple of times, most recently in August 2012 when curation was introduced. Curation essentially means organization. AppExchange is organized by function (e.g., finance, human resources, sales) and vertical (e.g., government, retail, professional services). This curation provides more opportunities for applications to show up at the top of customer search or browsing requests. That said, listings for "most popular," "new," and "free" applications are also available and highly valued by both customers and partners. The AppExchange Economy The AppExchange economy is booming. It took about five years, from 2006 to September 2011, for AppExchange to reach the 1 million installs milestone and only another two years to more than double that number. Potential customers are installing, on average, over 2,000 apps per day; 46,250 apps per month; and 520,000 apps per year. Plus, AppExchange partners have generated over $1 billion in revenue for their own businesses to date. With over 2,000 apps available on AppExchange today, those numbers are expected to continue to accelerate in the coming years. While it is important to understand that an install is not a customer purchase of an application but a lead, many ISVs on AppExchange find the quality of these "leads" to be extremely high and report conversion rates for leads to qualified opportunities in the double digits, ranging from 17% to 71%. The conversion rates for qualified opportunities to closed deals are also in the double digits, ranging from 10% to 25%. Lack of quality leads is a common complaint from ISVs partnering with software vendors, but that doesn't seem to be the case with salesforce.com partners. Instead, the common theme is the high quality of the leads and the ability to turn them into paying customers. Partners are also reporting that the number of closed deals attributed to AppExchange opportunities are accelerating, doubling and even tripling, year over year. There are currently over 2,000 apps on AppExchange, and customers are responding. 92% of the apps on AppExchange are installed at least once every 90 days. Over 65% of SMB customers (>100 employees), 71% of midmarket customers (100–500 employees), and 70% of enterprise customers (over 500 employees) of salesforce.com have installed at least one application from AppExchange. Similar figures are seen by industry vertical: 75% of financial services customers have installed apps, 69% of healthcare, 65% of food service, and so on. Clearly, salesforce.com customers are looking for and finding new apps on AppExchange to download. ©2013 IDC #244254 4
  5. 5. Successful Vendors on the AppExchange What are software vendors doing to drive success through AppExchange? First, it is important to consider how AppExchange fits into a vendor's overall marketing strategy. For vendors that sell an add-on product exclusively to salesforce.com customers, AppExchange may be the marketing strategy. For others, it is part of an overall strategy that includes a reseller channel, Webinars, advertising, search engine optimization, and other methods. For all partners, large and small, AppExchange is a common touch point to engage prospective customers. Next, the AppExchange listing needs to be managed. Successful partners make sure not only that the basics are covered (e.g., high-quality product descriptions, online demos) but also that sufficient and high-quality reviews from credible reviewers are in place. Negative reviews are not "The reviews are important as the best testimonial is from customers. necessarily bad; they can be Negative reviews can be painful, but if you create an action plan and considered an opportunity to engage the customer success team, they can be turned around. engage with the customer. Positive reviews are great because they connect the promise of the Sometimes the recovery solution with real-world experience. Many customers talk about the process to rectify a negative importance of reviews in their buying cycle, and the AppExchange is a situation can be a very positive great venue for sharing and learning." — Director, Product and credible story. Management, BMC Remedyforce Carefully consider the keywords that prospective customers use to search to ensure that your application is appropriately part of the result. It's a fine balance between showing up in the right places and just showing up in every search request. Be aware that customers get annoyed if they ask for a "point of sale" application for use in retail and are shown results that start off with a task management application. While there is certainly a need for task management applications in retail environments, it's not quite what "We spend a lot of time on our listing. It's important to get the right the customer is looking for during keywords in the right places. We believe this is a good use of our that search and may create a marketing time." — CEO, FinancialForce.com negative impression of your company. Use AppExchange yourself to find opportunities to partner with other salesforce.com partners. Every customer needs something unique. For example, one ISV tells a story about a prospective customer that needed on-the-fly translations into Mandarin Chinese, a feature that was not included in its application. The sales engineer doing the demo went to AppExchange and found another partner who could do what was needed. Using the open APIs available on the Salesforce "Close to 40% of our closed deals are coming from AppExchange." — Platform, the sales engineer COO, Conga incorporated the other partner's solution into the demo and won the deal for both salesforce.com partners. ©2013 IDC "AppExchange is the juice to get you started, but you still need to do the fundamentals." — CEO, Jobscience #244254 5
  6. 6. Leverage the free trials to give prospective customers access to demo data in a production environment. ISVs report that the delivery process for the trials "Trials are essential for risk-free access to our application. The works well because a conversion rate from trials to closed deals is five times that of initial prospective customer can sign leads." — Founder and President, Bracket Labs up in about a minute and have access to the system within 10 minutes. Trials are a good way for customers to try out your application in a safe environment as you move them through the sales process to deal close. FUTURE OUTLOOK Learning from the consumer marketplace, business buyers increasingly want to buy applications online and manage the process themselves. Business buyers are educating themselves on the available application landscape and then choosing a shortlist of vendors to consider. As enterprise application marketplaces continue to learn from consumer commerce, it is expected that additional tools for marketing analytics and customer traffic patterns will be added to aid vendors in their ability to market effectively. IDC also expects to see more connection between the hyperinvolved community and the marketplace, beyond the often standalone reviews and ratings. This means that the questions and answers posed on community Web sites (those of the software vendor and third parties) can be pulled together to offer a richer knowledge base to the potential buyer. Further, the process of buying complex business applications (e.g., those that may have complicated pricing and discounting structures, contracts) will be simplified and moved online. OPPORTUNITIES/CHALLENGES Opportunities for Software Vendors The opportunities are significant for software vendors that build their application on a specific platform, such as Force.com, and then choose to use an application marketplace as a component of their overall marketing plan. First, consider the type of application that your company will build. Significant need and market opportunity exist for microvertical- or geography-specific applications. This means applications that address specific business processes for a specific microvertical, such as regional banks, dairy farmers, and car dealerships. Depending on government regulations, each of these industry-specific applications may need a geography-specific application. It is IDC's opinion that the software market for cloud-based industry- and geography-specific applications has hardly been tapped. Additionally, these application areas drag along services and other revenue opportunities for software vendors. There are many examples of ISVs that have built an industry-specific application and turned it into a $100 million+ business, such as Veeva Systems, which provides CRM applications for the life sciences industry. ©2013 IDC #244254 6
  7. 7. Consider carefully the market potential of the platform and the time to market to build an application on that platform. For example, salesforce.com has a large and growing user base that represents a starting point for your own application. These users typically have good awareness of AppExchange and look there first when researching a new application to buy. But salesforce.com also has brand recognition that prospective customers, who do not necessarily use other salesforce.com applications, recognize and respect. These prospective customers may find your application first and then add on a salesforce.com application later. In addition, take into account the time to market to build your application. Many software vendors report that they built and launched their first application on AppExchange in only a few months. In addition, consider marketing strategies that make full use of the application marketplace. Is your application listing complete? Do you have high-quality and well-written reviews from credible reviewers? Are there enough reviews? Do you have the right keywords listed so that you can effectively manage the search engine optimization that brings your application to the top of the list? For some applications, the marketplace can be the only marketing that the software vendor needs to do and funnels potential customers into buyers. For other vendors, the marketplace is one of several tools that work together. The marketplace may be only the initial point of contact with a potential customer, who then works through a traditional sales cycle with a sales representative. Or it is one of several sales channels used to attract potential customers to your product. Challenges for Software Vendors When a marketplace is available, it is tempting to be lazy and expect that once listed, the leads will come flowing in and nothing else is needed. Remember that like your Web site, your marketplace listing needs to be managed. Learn how the marketplace uses searching techniques and keywords so that your products show up when potential customers are searching. Manage the ratings and reviews by encouraging customers to provide positive reviews and working with those who provide negative reviews to change the situation into a positive event. Educate your prospective customers to help them through the buying process so they can make an informed decision and not just assume that your application, which addresses a complex business scenario, is too complicated to use. If necessary, ask an independent third party to review your listing and see how it can be made simpler. It can also be tempting to build an easy application or another generic project management or travel expense tracking application. Really consider if another version of a horizontal application is needed. Can you instead create an industry- or geography-specific version of that accounting application that truly meets the needs of a niche industry? It is estimated that there are over 600 million small businesses worldwide, and they cross many thousands of vertical industries. An accounting solution that is specific to the needs of dental offices may be a more effective way to stand out from the crowd and focus on a niche area that is ready for cloud-based applications. CONCLUSION The Salesforce AppExchange, launched in 2006, continues to be, in IDC's opinion, one of the leading marketplaces for enterprise applications in the software industry. Other marketplaces — both vendor/platform specific and independent — exist, but AppExchange, like Apple's App Store, remains the industry standard against which they are measured. ©2013 IDC #244254 7
  8. 8. About IDC International Data Corporation (IDC) is the premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications and consumer technology markets. IDC helps IT professionals, business executives, and the investment community make factbased decisions on technology purchases and business strategy. More than 1000 IDC analysts provide global, regional, and local expertise on technology and industry opportunities and trends in over 110 countries worldwide. For more than 48 years, IDC has provided strategic insights to help our clients achieve their key business objectives. IDC is a subsidiary of IDG, the world's leading technology media, research, and events company. Global Headquarters 5 Speen Street Framingham, MA 01701 USA 508.872.8200 Twitter: @IDC idc-insights-community.com www.idc.com Copyright Notice External Publication of IDC Information and Data — Any IDC information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Vice President or Country Manager. A draft of the proposed document should accompany any such request. IDC reserves the right to deny approval of external usage for any reason. Copyright 2013 IDC. Reproduction without written permission is completely forbidden.

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