October 6, 2004 2:09 PM PDT
Start-up targets e-commerce on demand
Now Schambach is taking an unconventional approach to the e-commerce software market. In fact, he's not selling software at all. Demandware, his latest start-up, is hoping that the online, hosted model so successful for companies like Salesforce.com will translate well to the e-commerce world.
Demandware, a 20-person company founded in February by Schambach, who also started e-commerce pioneer Intershop in 1992, plans to launch a new hosted service early next year designed to let companies quickly assemble e-commerce Web sites.
Though many industry watchers and technology providers say that new hosted services and subscription models will revolutionize the enterprise software business, those ideas have yet to penetrate the upper reaches of the e-commerce market.
People looking to set up custom, high-volume, commercial e-commerce sites have a few options: buy thousands of dollars worth of computing gear, and hire programmers and other staff to assemble it all, or sign up with a hosting company for a one-size-fits-all storefront. "Neither of those two basic approaches really helps (midsize) companies that need advanced functions and want to look like Amazon.com," Schambach said.
Demandware is offering a third option, and targeting companies that want e-commerce sites in a hurry but don't want to set up the software themselves or settle for the cookie-cutter, me-too look and feel of available hosted services. The company's service, which uses the latest technology, such as grid computing and Web services software, combines the rapid start up offered by hosted services with the endless customization available through specially built software.
Schambach said Demandware has five pilot customers that are starting to work with its software and that the company plans to launch its service in the first quarter of next year.
Demandware is also using a simplified pricing model that mirrors offers from Salesforce.com, which provides sales force automation and support services for a monthly fee. Though Salesforce.com didn't invent the hosted services idea, it is largely credited with popularizing--and profiting from--the notion. The company earlier this year launched a highly publicized initial public offering.
Schambach said that a company doing $5 million of business online a year would spend between $3,000 and $5,000 per month for a customized, e-commerce site hosted by Demandware, based on how many customers they serve per hour.
That kind of pricing compares well to other options, said Andrew Bartels, an analyst with Forrester Research. E-commerce software from Microsoft and other providers starts at about $25,000 per server. A full-featured product such as software from ATG costs anywhere from $100,000 to more than $200,000, he said. You can double that total when maintenance and support are added. And that's before programmers even touch the software. "So looking at those numbers, being able to pay by volume can be a very attractive option," Bartels said.
The hosting dilemma
If it's such a good idea, why haven't other companies taken the same approach? Bartels said the level of hosted customization that Demandware plans to offer is especially difficult to pull off while still turning a profit. "It's hard to do. Doing a lot of customization on a hosted model means creating different instances of software for each site. It's harder to maintain and it blows up your economics. That's been the dilemma for vendors and users in the past."
Many companies, known as application service providers, that launched in the first wave of hosted services in the late 1990s failed because they didn't allow customers to set up applications that could be easily reconfigured, like the custom-designed counterparts they were designed to replace.
Salesforce.com largely sidestepped that dilemma by offering what amounts to one-size-fits-all sales force automation services. "One of the constraints around Salesforce.com is that there is not a lot of customization. When you're dealing with e-commerce, people want a lot of customization, because nobody wants to look like their competitor. That's why hosting combined with customization is so attractive," Bartels said.
Schambach, when describing the potential for hosted services, also echoes the "no software" mantra of Salesforce.com founder Marc Benioff. "Enterprise software, from a license and delivery standpoint, is over. We need a much, much more customer friendly delivery model," he said.
Schambach's ace in the hole might be the Intershop software that underlies Demandware's service. Bartels said that software is flexible, and might be well suited to a hosted model.
A bigger challenge for Schambach is that the overall market for e-commerce software is flat. The company is banking on rosy projections from Forrester and others that online retail sales will grow by more than 25 percent this year, fueling a rebound in sales of e-commerce software and services.
If companies decide to dip a toe in the e-commerce market, a hosted option might be more attractive than the large up-front costs associated with building a site from scratch, Bartels said. "Demandware's concept is intriguing--the question is one of execution for the company. It's still new and not tested. But it looks likes a very interesting option."
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