Selling Software Solutions to SMB Markets – Who and How To Target

A recent article summarizing a report published by AMI-Partners predicted that software /services markets for small and mid-sized businesses in North America would grow to $35B by 2013.  What then caught my eye was the AMI-Partners definition for the SMB markets:  small businesses have fewer than 100 employees; mid-sized companies have between 100 and 999 employees.

Back to the continual conundrum:  what the heck is “SMB”? 

When talking about target markets for software offerings, the great divide seems to be “enterprise” and “SMB”.  Enterprise registers consistently as any company with revenue of $1B or greater.  For all of the other “non-enterprise” companies (estimated anywhere from tens of millions to 200-300 million globally), people toss around the terms “SMB” / “SME”, with no idea what they mean in relation to actual companies and target markets. Some explanations say that SMB was the North American term, and SME was the EMEA term; others say that SMB is the low-end and the SME is the upper tier of the mid-market.  But these high level explanations still do not clearly define, or usefully segment, the true composition of companies in the vast sea of SMB  (except that revenue will be less than $1B….)

 

Enterprise software vendors don’t know who they are aiming at or how to hit the target

In the past 5 years, more and more large enterprise software vendors claim interest in so-called SMB markets; with the current recession, the noise from these vendors has increased. But most of these vendors really don’t seem to understand how to connect with the actual companies that comprise the vast SMB landscape.  These vendors expound the “right” marketing words, including claims for providing niche and industry-specific solutions for “SMB” companies, but most of these same vendors continue to miss the mark widely.

 

In reality, enterprise software vendors tend to treat the SMB as one market, failing to create in-depth segmentation that will then provide better definition of their offerings and sales approach. The constituents of the SMB landscape have clear differentiation in company size, industry/geographic focus, strategic goals, business needs – really a disparate array of sub-markets. If a vendor pursues this market as a single entity, fragmentation will smack the vendor in the face, resulting in little success and very little learned from the experience.

 

When most large enterprise vendors say “SMB” they really mean “M” – the Mid-Market – and then they usually mean the upper tiers of the mid-market, companies with revenues of $200M - $999M.  And most times the real target group falls in the $500M - $999M revenue range. It is rare for these large vendors to ever reach down to the “S” of SMB.  Even Microsoft frequently misses opportunities with truly small businesses, other than for selling seats for Office or Windows, through its over-complicated licensing and partner relationships.

 

And it’s not just software vendors who can’t seem to get it right. Most software industry writers and analysts wear the same blinders when it comes to discussing SMB market – these writers and analysts usually look at SMB with the bias of “enterprise eyes”, and in doing so, miss salient points frequently.

 

  

Who is the SMB / Mid-Market Company? Understanding more through meaningful segmentation

The biggest mistake many software companies make is to generalize the needs of SMB or Mid-Market companies as one entity, instead of realizing that performing the segmentation and then the analysis of each segment will yield very diverse profiles. These diverse profiles are the keys to software vendors more correctly understanding each segment and then building better solution and sales approaches customized for each segment. Vendors must understand the particular needs of each segment and their sophistication levels, when it comes to software applications. It is also essential to understand that there is even further diversity within each segment of the SMB / Mid-Market. Broad generalizations at any level of the SMB landscape will simply lead to trouble, and limited sales, for the vendor.

 

 

 

What the SMB / Mid-Market Want in Software

SMB / Mid-Market companies use technology to stay competitive and achieve economic success. These companies are not interested in “technology for technology’s sake”.

 

The Upper Tier of the Mid-Market is similar to larger enterprise companies, but there are also differences.

· Software solutions as part of corporate strategy and to drive growth

· Technology as means for achieving core business goals

· Fewer IT resources for implementation, support, maintenance

· Prefer packaged software/services offerings; and offerings from VARs who provide services and support

· Upper Tier contributes most of SMB/Mid-Market spend for software

 

The Mid and Lower tiers have definite challenges when taking on new software solutions:

· Very limited, sometimes no IT resources

· See value of new solutions to optimize productivity but lack resources needed to deploy 

· Opt for less costly options or point solutions; SaaS offerings are growing here

· Prefer out-of-the-box solution sell

· Look to VAR’s, SI’s, solution providers to make sales in these tiers

· Mid-tiers: also purchase from regional or national retail chains

· Lower tier:  more likely to purchase from regional or national retail chains

 

Finding the Right Targets – Segmentation by Revenue

Target market segmentation is frequently handled either using revenue or employee head count, to help determine the size of a company.  In most cases, revenue is the better gauge to determine whether a particular company is a fit (or not) for a particular software offering.  Obviously, revenue indicates a factor of the fiscal health of a company.

 

An important advantage of using revenue for segmentation is that good estimates of available spend for technology purchases can be calculated.  In North America, the SMB / Mid-Market IT average spend is 2-4% of annual revenue (in non-recessionary times). Potential spend will be very helpful in determining which SMB segments are the right ones for a software offering.  Then marketing and sales groups can further refine knowledge of select segments to better connect with software offerings and marketing/sales approaches.

 

The “Microsoft mentality” of focusing on number of seats (head count) as a means of segmenting target markets (rather than revenue) can cost software vendors good customers, especially for business applications.  The ability to pay for more expensive and more complex applications (whether used by a few or many people) is an important qualification for any vendor.  There are many SMB / Mid-Market companies with lower head counts, but substantial capital for purchasing software, and who gain competitive advantage by implementing the right software solutions.

 

A “reconciled” matrix of how to segment “SMB” / Mid-Market companies – based on analysis of multiple sources (industry analysts, software vendors, industry writers -- segmentation definitions from analysts, writers and software vendors are all over the place and do not align cleanly with each other)

 

 

 

 

Target Refinement: Existing software solution ecosystems for each segment

Another definitive method to further understand a particular SMB / Mid-Market segment, and target prospect, is to do an inventory of the software applications currently used by a prospective customer.  A quick analysis of the ecosystem of applications for accounting/ERP, CRM/SFA, databases/servers, network management, will reveal additional factors that will help align software offerings and marketing/sales approaches for target companies.

Discussion with mid-market customers on preferred solution delivery options will reveal strategic direction and will further refine what software offerings to pitch.  More SMB / Mid-Market customers are taking on SaaS-based solutions and are interested in the savings from cloud-based applications.  However, these same companies will still have interest in applications with on-premise licensing.  Differentiating the kinds of software solutions with the preferred delivery options is a necessary exercise to sell into different segments.

 

 

About the author: Julie Hunt is an accomplished market intelligence analyst, providing strategic market and competitive insights for the software industry. Her 20+ years as a software professional range from the very technical side  to customer-centric work in solutions consulting, sales and marketing.  Julie shares her takes on the software industry via her blog Highly Competitive and on Twitter: @juliebhunt   For more information: Julie Hunt Consulting – Market & Competitive Intelligence Services  

 

Comments

[Dave Manzer]

Great article, Julie. I like the idea of segmenting SMB by revenue rather than HC. As a former sales and marketing professional for business software VARs, I rarely looked at HC. For me, it was always about the revenue. There are always some companies out there whose HC may be low but revenue high and level of operational sophistication equally high. I would argue that you should reduce the threshold of the "Lower mid-tier" to $100k as some businesses are extremely tight-fisted and remarkable unvisionary when it comes to running their operations. And that $100k includes deployment costs, to boot! Keep up the great analysis!!

[Julie Hunt]

Hi Dave, Great comment esp. with your experience and POV re: software sales and the VAR world. You hit the nail on the head as to why revenue reveals far more about potential prospects, with so much software providing productivity for doing more with fewer employees (HC), and as you say, there are many businesses that have sophisticated technology needs that don't necessarily employ a lot of people. But I like to include HC with revenue segments to add a dimension of perspective.
Best,
Julie

[Max Gano]

Really enjoyed your article. We are launching a new SaaS service supposedly directed at mid-market organizations but we keep gravitating to what I believe are large and F1000 types of characterizations of the market. We all either come from such organizations or have spent the majority of our time serving them. Our instincts are simply not yet tuned into the mid-market signals.

I am sharing this post with my team to re-emphasize the need to differentiate both in terms of the widely varying sets of needs and the lessened layers of decision making, etc.

I read your position as mid-size companies tending to be much more pragmatic and focused in their selections, looking for quick return through directly addressing specific needs. But they are also willing to consider more efficient, cost effective alternatives to the traditional rack-and-run on-site installation of licensed software.

Time for us to revisit our assumptions and make sure we are dialed in correctly. Many thanks for the concise guidance you have provided.

[Brett Jackson]

Good information Julie. I prefer looking at the SMB using both revenue and headcount but your addition of potential overall technology spend is a useful third dimension. Thanks.

[Julie Hunt]

Hi Brett,
Thanks for taking time to read the article and for adding your thoughts. Especially when targeting smaller companies, it's really important to know the max amount that companies plan to spend on tech, to understand if a software offering is priced right for a particular segment.
Cheers,
Julie

[Scott Johnson]

Hi Julie,
My name is Scott Johnson, and I am the CEO of CopperEgg. http://copperegg.com Our mission is to unify cloud monitoring, server monitoring, application monitoring, IT analytics and automation.
Your article is excellent.
Your analysis helped provide context for me as I am thinking through how to communicate to our target audiences ... those companies interested in deploying SaaS in the public cloud. It is a mind-bending conglomerate (or shall I be chic and call it a 'mashup') of markets / technologies / and economics.
Thank you for your well thought-out article.
Regards,
Scott

[Julie Hunt]

Hi Scott,
Thanks for stopping by & sharing your thoughts. And thanks for the kind words & feedback - it's always great to know when my analysis / articles help people with their work.
Best wishes for success with CopperEgg!
Cheers,
Julie

[Wiseanalytics]

Hi Julie,
I think that more articles/blogs like this are desperately needed! When I saw the date that this was written, my first thought was - and most software providers still don't get it! Some of the companies I have worked with are between $3M and $5M in revenue and finding BI solutions that understand their business is difficult. Mostly, they are just treated the same as a department within an enterprise. Unfortunately, in these cases, these companies have more diverse data and business needs than a single departmental solution within a large enterprise.
Thanks, as always, for your amazing insights into a market that is still underserved by software vendors.

[Julie Hunt]

Hi Lyndsay - thanks for bringing your important insights to the conversation. I agree that a lot of software vendors still don't get how to build solutions for mid-market companies; this point becomes even more significant when I note that I began analyzing, building and using this approach for targeting small & mid-market companies - in 2005 - for my market intelligence recommendations to vendor clients.
Excellent commentary on the lack of right-fit BI solutions for smaller companies - thanks for adding your expertise here!
Cheers,
Julie

[Julie Hunt]

For further points, please take a look at this post from Lyndsay Wise @wiseanalytics >> "Do BI solution providers really help SMBs w/ expansion towards mid-market?" http://bit.ly/xgmSYP Lyndsay consults with SMB buyers of BI software solutions, so she has a great background for assessing right-fit BI solutions for smaller businesses.