With the success of companies like Salesforce.com (NYSE:CRM) and Taleo (NASDAQ:TLEO), prospects have looked bright for Web-based software players. But in last week's IPO for DemandTec (NASDAQ:DMAN), investors seemed more interested in dumping the stock. The price plunged from $11 to $9.09, ending the week at $10.

DemandTec develops software that helps retailers improve the pricing on their inventory, employing sophisticated data mining, forecasting, and statistical modeling. The average contract value is about $2.4 million, and customers include big names Best Buy (NYSE:BBY), Target (NYSE:TGT) and Wal-Mart (NYSE:WMT).

From 2005 to 2007, revenue has more than doubled to $43.4 million. Fiscal Q1 revenues grew at 32% compared to the numbers from last year's first quarter. However, the company is still operating at a loss; that's most likely the result of high R&D and marketing expenses. Although the company is still losing money, it's no longer losing quite so much. Over the past two years, net losses shrank from $9.2 million to $1.5 million, despite a 39% ramp-up in R&D to $15.3 million.

Unfortunately, the competitive environment is fierce. DemandTec faces pressure from business consulting operators such as McKinsey & Company, Deloitte & Touche LLP, and Accenture.

There are also the global powerhouses of SAP (NYSE:SAP) and Oracle (NASDAQ:ORCL). During the past few years, the firms have purchased a variety of retail-focused software companies such as Retek, ProfitLogic, and Khimetrics.

There's definitely a need for DemandTec's offerings. Retailers must survive on extremely thin margins, while dodging threats from comparison-shopping sites, deep discounters, and e-commerce players. Despite all this, DemandTec's competition isn't going anywhere, and its increasing success could squeeze the company's growth rate. As we've already seen in the past couple of days, that could make for a seriously shaky stock price.

Best Buy is a Motley Fool Stock Advisor and Inside Value recommendation, while Wal-Mart and Accenture have been tapped for Inside Value. You can check out either newsletter absolutely free for 30 days.

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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 4,317 out of more than 60,000 in CAPS. The Fool has a disclosure policy.