INSIGHTS
Funny, Beautiful Symmetry

There is a lot of unspoken information in last week's announcements by Sage and Salesforce.com (NYSE: CRM) about their respective contact managers. Each is creating a disruptive innovation that affects the other, and the symmetry of these dual and dueling announcements is frankly beautiful in a funny way.

To review, Sage announced the 2010 version -- with new bells and whistles -- of its flagship contact manager ACT!, and a day later Salesforce introduced its Contact Manager Edition (CME). On the surface, it looks more like Sage introduced its routine annual update and no more, while Salesforce jumped into a new market. However, if you look closer at the two situations you might get a different impression.

Price Competition

For a long time, Sage has been adding functionality to ACT! that has made it a very powerful and complete contact manager, and some would say that it crosses the line into SFA (sales force automation). If that's so, then Sage has a major price advantage in the SFA market and can steal SFA business from any number of vendors, including Salesforce.

However, Salesforce's CME announcement does to Sage what Sage has been doing for quite a while to SFA vendors. At a mere US$9 per month per seat, Salesforce CME is a no-brainer for individuals and entrepreneurs who want to keep track of customer information on-demand but whose businesses are small and do not require all of the functionality of CRM. ACT! could fit the same need and usually does, but now there's price competition.

Both companies face other competition from vendors like Microsoft (Nasdaq: MSFT) and Outlook, which is a virtually free, though limited, repository of basic contact information. But for our analysis, a customer still using Outlook or Apple's (Nasdaq: AAPL) Address Book is outside of the discussion.

Market Disruptors

In The Innovator's Dilemma, Clayton Christenson described the phenomenon of disruptive innovation in which a new entrant to a market disrupts a well-established vendor by providing a stripped-down product at a lower cost. The reasoning is that the established product vendor has, over time and because of increasingly demanding customers, over-engineered a product to meet the needs of the most demanding users. The disruptor enters the market with the advantage of having a smaller product that meets the needs of a large segment of the population and an upper price limit of the established vendor.

It is never a problem for the challenger to make money below the cost level of the incumbent, and frequently the incumbent flees the lower end of the market to chase the more profitable customers up market. That's what Salesforce did to Siebel and what it is attempting to do with Sage right now in the contact manager space. However, Sage is more or less doing the same thing in SFA. ACT! is not a full-function SFA product, but it has a lower price point than even a Salesforce, Oracle (Nasdaq: ORCL), Siebel or NetSuite subscription, and it offers a lot of functionality that many SFA customers might find adequate.

There are many complications having to do with the idea of product line cannibalization -- each company has an SFA/CRM product with better margins to protect, for example. So Salesforce limits its CME offering to two users; if you need more, you need SFA, they believe. The same is true for Sage. SalesLogix is their full-function CRM package with SFA. So neither company can swing for the fences with their disruptive innovation strategies. Success for either of them at the low end would result in some takeaway business from the other guy, but it would likely hurt the house brand SFA too.

Room for a Third?

There is a danger in this thinking because it leaves the way open for a third competitor to enter the fray unencumbered by a need to protect an up market product. I am not sure such a vendor exists -- at some point you get to the top of the food chain. Nothing hunts lions other than humans, but that's a different story.

It's hard to say which vendor has an advantage. Salesforce has well over 1 million seats deployed, and ACT! has about 2.9 million licenses under maintenance contract. Salesforce is a sales and marketing juggernaut, and Sage sells through a channel that is the envy of many vendors in the space.

This situation is the picture of yin and yang and should be entertaining to watch. Meanwhile, the competition definitely benefits the customer.