- Salesforce raised its list prices in August for the first time in seven years.
- Wall Street analysts say the move may boost sales for the second quarter.
- Cost-conscious customers are mulling alternatives from competitors such as Microsoft and HubSpot.
When Salesforce announced in July its first price increase in seven years, most of Wall Street cheered, but some industry experts are concerned it may alienate customers who think the increased costs aren't justified and provide an easy opening for competitors including Microsoft and HubSpot.
Salesforce shares surged after the software giant announced on July 11 that it would increase prices by an average of 9% on its customer-relationship-management products, including Sales Cloud, Service Cloud, Marketing Cloud, Industries, and Tableau.
On the company's second-quarter earnings call on Wednesday, analysts expect to hear that the price hike sparked a revenue bump as customers rushed to renew contracts three weeks before the new prices went into effect on August 1.
A big revenue boost sounds like good news for Salesforce, which for the past year has faced pressure from activist investors such as the hedge fund Elliott Management to cut costs and increase profit margins. Salesforce CEO Marc Benioff resolutely complied, laying off 10% of the company's workforce, shedding real estate, and dropping employee perks over the past several months.
The price hike has a flip side. Some cost-conscious customers who wouldn't have seriously entertained the idea of migrating off Salesforce are starting to consider it in some cases, IT consultants told Insider.
"Microsoft is aggressively leaning on their customer base," Adam Mansfield, a commercial-advisory practice leader at the IT-spending consultancy UpperEdge, said. "Discounting, investments, credits — they're coming in heavy. I've seen that uptick in 2023, and I don't think it's slowing down."
"Salesforce is the clear CRM market share leader, and increased its revenue more than any other CRM vendor in 2022 over the previous year," a Salesforce spokesperson said in an email to Insider.
Microsoft and HubSpot did not respond to requests for comment.
Salesforce customers were 'gobsmacked'
The prospective revenue boost may not be worth it in the long term, especially when companies are tightening IT budgets in an uncertain economic environment, Mark Moerdler, a Bernstein analyst, said.
"Any price raises could cause customer scrutiny and dissatisfaction," Moerdler wrote in a note published earlier this month, adding that clients could use it as "an opportunity to review usage."
Already, consultants see Salesforce customers scrambling to address these price hikes. Jon Winsett, the CEO and managing partner at the Atlanta IT-spending advisory NPI Financial, said his firm immediately alerted all its clients to the price increase.
"We were working with one of our accounts right as the price increase was announced, and they were gobsmacked," Winsett said. "They were just like, 'What?' They were trying to get the price down year over year, and now it just out of the box goes up."
Some have said Salesforce had been drawing a harder line in negotiations in the months leading up to the price increases. One Salesforce customer, a contract negotiator for a small public company, agreed to discuss their recent contract renewal with Insider on the condition of anonymity because they were not authorized to speak with the press. Their identity is known to Insider. The contract negotiations took place at the beginning of this year.
The customer was surprised when they discovered Salesforce planned to up the total cost of their company's $1 million contract by 5% on a three-year renewal with no changes in offering.
Miffed and unable to get the budget to account for the price increase, the customer ultimately renegotiated to an 18-month contract, cutting down on some services.
"It was crazy," the customer said. "I understand that costs go up over time, but a 5% increase at that price was just not welcome at my company."
Customers consider Microsoft
Mansfield, the UpperEdge advisor, said his clients were examining their spending across their software vendors, including Salesforce.
"Salesforce, for my customers, happens to be on the top of the list for technology spend," Mansfield said.
Mansfield added that some of his clients were discussing alternative vendors for some Salesforce products. Microsoft, a major cloud provider that shares customers with Salesforce, is one eager candidate.
Moerdler said that Salesforce's artificial-intelligence offerings were priced high compared with competitors — especially Microsoft, which is adding AI functionality to some of its sales and service products at no additional cost to the customer. That, plus the company's head start on AI from its investment in the ChatGPT maker OpenAI, could sway customers.
"It's little things like this — price increases and tactical stuff — where people who are in control of the road maps say, 'Well, maybe we really will start to think about this,'" Mansfield said. "Coupled with that, I've got Microsoft knocking down my door every day telling me, 'Hey, we're another tried-and-true strategic vendor of yours. You want AI? We are AI.'"
Mansfield added that some of his customers were frustrated with Salesforce for touting its new AI functionality at a time when they wanted to focus on getting the most value from products they'd already purchased.
"We have customers that come to us and say, 'Look, we actually really like the product, but the problem is we know there's more that we can be getting value from, and we're struggling to figure out where is Salesforce to come help us with that. Stop talking to us about AI and all these new features you've added,'" Mansfield said.
The Salesforce spokesperson said in an email that the company shipped new features monthly and an average of over 400 new capabilities and innovations annually, adding that not all of them are AI-based.
"We are focused on AI given its incredible potential, but that's not all," the spokesperson wrote.
HubSpot on the heels
Microsoft isn't the only company that could benefit from Salesforce's price increase. The customer-relationship-management-software company HubSpot uses customer self-service to sell its software — a stark contrast from Salesforce's sales-driven culture.
Self-service is becoming increasingly attractive, especially as customers slash IT spending. Rishi Jaluria, an RBC Capital Markets analyst, said he'd heard of at least one company recently making a HubSpot deal meant to replace Salesforce Service Cloud.
"From a total cost-of-ownership perspective, HubSpot is much cheaper," Jaluria said. "Even if the list prices are somewhat similar, you don't need to pay as much for services and customization. You don't need a full-time Salesforce admin when you're a HubSpot customer. You can imagine that resonates pretty well in this environment, and over the longer term, it does create more opportunity for HubSpot."
