What is business model purity worth? Will Price of Hummer Winblad did an interesting anecdotal analysis comparing two on-demand software companies : RightNow Technologies and Salesforce.com. Both are known as "on-demand" or SaaS (Software as a Service) providers. Both offer customer relationship management software, both have considerable operational momentum and both are quoted on NASDAQ. But RightNow is trading at 4.5x revenues (as at 30 Sept), Salesforce at 9.5x revenues.
The difference may be due to many reasons, including the fact that Salesforce is far and away the market leader in its segment, and growing at a faster rate than RightNow. But Will uses the gap to open a debate on the value of pure business models. In short: Salesforce only offers its software as an online service, while RightNow offers customers the choice of installing its software behind the firewall or accessing it as a hosted service.
As board members in scrappy, entrepreneurial companies we often discuss the trade-offs between responding to customer requests or maintaining the purity of the business model. Especially in bootstrapped businesses, where every customer engagement counts, it can be very difficult to say no to special requests. But over the medium-term, business model purity does create better scalability, more powerful positioning, stronger messaging in the market and -- I would argue -- more equity value.
The trick is to use early experimentation with customers to find the model that works best, and then to be as disciplined as cash flows allow in perfecting and pursuing that model. Having a pure-play approach that's easy to explain makes it easier to sell to customers, to recruit good people, and to position the business to investors. All these accelerate growth.