Demystifying the Numbers behind Salesforce.com’s AppExchange

The AppExchange has just flown past a much more important milestone than it’s 10th birthday. 3.5 million app installs. When one thinks of the App Store (a term Marc Benioff gifted to Steve Jobs) and Google Play, 3.5 million doesn’t sound like a big number. After all these 2 app marketplaces in combination accounted for over 300 billion downloads and over $300B in revenues last year. So perhaps the AppExchange has not even exited the troposphere. Right?

Not if you are a serious B2B app vendor. An AppExchange listed app (not including freebies) generates an average of well over $900K per annum. That will probably hit $1M in 2016 — and that’s just from revenue transacted directly in that marketplace.

My goal is to demystify the AppExchange and it’s numbers.

In a nutshell: There are 2,948 apps listed on the public AppExchange. Of these apps, 1,650 are not freebies. $1.5B in license revenues were generated via AppExchange transactions for the ecosystem last year. Hence >$900K USD was generated per paid app annually. App category breakdown includes Sales (41%), IT & Administration (22%), Collaboration (10%), Marketing (9%), Customer Service (8%) and Finance (6%).

Most companies proclaim themselves obsessed with customer success. Most of the successful ones are telling the truth most of the time. In reality successful companies are obsessed with some weighted combination of market share, company valuation and profit. Customer centricity and great UX just happen to be key pre-requisites to being a successful company — with some temporal exceptions amongst virtual monopolies. Profit has unjustifiably been a bad word for a long time now.

“If your conduct is determined solely by considerations of profit you will arouse great resentment.”
Confucius (around 2,500 years ago)

It’s all about the numbers. It always has been.

The rate of app downloads is not accelerating. However the average value of those downloads is accelerating fast. By the end of September 2013 app downloads had hit 2 million. It took another 19 months until the close of April 2015 to hit 3 million downloads. And it has taken nearly 9 months to hit 3.5 million. Hence the numbers are stable, and from that we can extrapolate that current downloads are 666,000/annum.

However AppExchange revenues are growing fast — so the average transaction value has to be increasing. And this is not unexpected. The average Salesforce customer license numbers and associated revenue has continually increased. By extension it is to be expected that the enterprise cloud enabled ecosystem app will have grown similarly. A single app download may be deployed to hundreds or thousands, or even tens of thousands of employees. The average app download is to less than 100 users. If we were to assume that free app downloads were as frequent as paid app downloads, then the figures are as follows:

$1.5B annual revenues / (660K downloads x 56% paid apps) =approx $4,000. However if we make a reasonable assumption that that freebies are downloaded 4X as much as paid apps, that would push the download ratio from 50 : 50 to 80 : 20 and that leaves the average AppExchange transaction value at $10,ooo. This assumption is difficult to get correct (even approximately) and is by far the biggest leap in this article, but it’s not unreasonable. Just consider how often the Salesforce 1 mobile app, all the various packaged dashboards and other cool stuff from Salesforce labs are downloaded. All free.

If the average app download value is somewhere in the region of $10,000, then the the average app just needs 90 downloads per annum to hit the average revenue level of $900K/annum. Salesforce will take about 15% or $135K of that — leaving the vendor with $765K. If the vendor has 3 ‘average’ apps on the AppExchange, they are generating well in excess of $2M after Salesforce takes its slice. This is a far cry from the iOS App Store or Google Play. Of course the fly in the ointment (I hear you scream) is that the average (or mean) is not the same thing as the median. You need to be inside the top 10% of listed apps to hit that $900,000 revenue number. Nevertheless the opportunity is huge.

And what about the future?
Neeracha Taychakhoonavudh (Salesforce’s SVP of Partner Programs) says Salesforce will boost AppExchange revenues 5X over the next 5 years. Let’s assume they’ll take the same average cut. The published data tells us that app download rates are neither increasing nor decreasing (yes it does!), but we know revenues are accelerating at a clip. If Taychakhoonavudh’s estimate is correct and all other trends and assumptions hold, then the data tells us that the value of the average transaction to a vendor will be $8,500 x 5 = $42,500.

That sounds high, but we’re talking about 5 years hence. By then enterprise class cloud apps will be munching the business world. My prediction is that rate of downloads will actually accelerate and that average number will be less than $20,000, but recent trending indicates otherwise.

To further place this in context, the AppExchange is only the tip of the Salesforce ecosystem iceberg. IDC say that “by 2018, Salesforce and its ecosystem of customers and partners will create 1 million jobs and generate $272 billion in GDP impact worldwide.” Salesforce has a market value of $47.5B at the time of writing and is predicted to hit $8.1B in revenues in 2016. While Salesforce is by far the largest SaaS (Software as a Service) company on the planet, it is a fraction it’s own ecosystem.

The AppExchange is a good place to have an app. But it’s definitely not a place for a nap. Listed apps should not be left for long periods without upgrades and improvements. When you list it, be prepared to regularly upgrade and improve the app. If you come from a legacy software background, buckle your seatbelt and prepare for a severe cultural change if you want to survive. You’re now competing with companies delivering Enterprise Class Cloud Computing solutions. Innovate constantly to survive and thrive.

The difference between winners and losers on the public AppExchange is enormous. As for the private AppExchange? To find your app someone will have to put the name of your app and the word ‘AppExchange’ into Google (or whatever web search tool you use). It should be renamed the Invisible AppExchange. If Salesforce has a direct competitor of your app (or you think they are likely to acquire one soon), consider that carefully. The Invisible AppExchange is not where you want to end up.

Not every app can lead to the billion dollar club. Docusign, Veeva CRM and Apttus CPQ are amongst an elite group of hyper-successful apps. One source estimated that just 440 apps (15%) currently listed on the AppExchange are clearly profitable. That has to be to qualified with the fact that 44% of the apps are freebies and some of the apps have just been launched in the last year or two. Furthermore this is B2B SaaS. Many companies have attracted investments to engage in a calculated land-grab — pouring money into customer acquisition with profitability something forecasted to happen further out. A strategy that feels riskier today than this time last year.

Your app would have to be amongst the 10% most successful apps on the AppExchange today in order to have the average revenue level of marketplace generated $900,000 i.e. the median is a lot lower than the average.

There is a statement of intent to grow the revenues generated by this marketplace 5X in 5 years. Salesforce has been incredibly good at hitting it’s targets since it’s foundation.

Plato said that a good decision is based on knowledge and not on numbers. Like most all-encompassing statements, it is incorrect in many contexts including this one.

Based on the numbers, if you have an app or you’re designing/building one, it would be crazy not to look carefully at the lucrative possibilities afforded by an AppExchange listing. The Salesforce Ecosystem is a a giant. It never sleeps and it’s growing at a clip. It is hands down Salesforce’s greatest achievement — and the AppExchange has been a key component in all of this. It is practically a certainty that the importance of the AppExchange will grow considerably in the mid-term.

“Perfect numbers like perfect men are very rare.”
René Decartes

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written by Stephen Cummins

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