Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Category: Pricing

Musings on Software Market Segmentation and TV Morning Shows

I like to check out one of the morning TV shows on one of the major US-based networks for a few minutes, as I’m eating my breakfast cereal. There are 3 major programs on at the start of the day: NBC’s Today Show (the traditional market leader), ABC’s Good Morning America (the perennial runner-up) and the recently re-branded CBS This Morning in (last place for many years).

So what the heck does this have to do with software market segmentation, you ask?

I’ve been struck by how much the morning show race reminded me of the software industry has become more vertical over time. In particular, there are some strong parallels between the software business and the morning shows with respect to the product being “soft enough” to make relatively easy product changes as part of a new segmentation strategy.

Recent changes in strategy on the TV morning shows

The Today Show has been the “10,000 lb Gorilla” of the morning shows since the beginning of the category. They’ve had a large lead over their competitors across multiple changes in on-air personnel and even societal cultural changes over the years. The Today Show’s format has been aimed at a “horizontal” audience–a little bit of something for everyone. They start with hard news at the beginning of the show and it gradually becomes “lighter”, transitioning to Pop culture, celebrities and gossip as the show progresses through its marathon 4 hour time slot.

The other two major shows have taken a real beating at the hands of NBC in the ratings, with many tweaks to their formats and even more turnover in personnel over those many years. Fundamentally they have tried to compete by “building a better Today Show”, essentially competing head on with the market leader in a horizontal fashion. But over the last couple of years, ABC and more recently CBS have changed their strategy, utilizing a much sharper segmentation than at any point previously. ABC has essentially gone “younger and lighter” over the last couple of years. The show has the least serious tone and is the most “fun” of the three, focusing a lot of time on pop culture and other topics skewed toward younger viewers. It’s paid off. Good Morning America has taken a clear lead over the Today Show due primarily to this new segmentation and to a lesser extent some personnel missteps at NBC.

After many years in last place, CBS has segmented sharply in the other direction with a shorter 2 hour program focused almost entirely on hard news and staffed by serious, credible news people. It’s too early to say how successful this will ultimately be for CBS, but they have won over this writer and have picked up some market share overall-I’m watching consistently CBS in the morning for the first time. The Today Show has been struggling to remix it formula and regain its clear lead, looking much like a complacent large company that has grown fat, dumb and happy as a result of years of unchallenged success.

Software Market Equivalents

Ok, enough about TV morning shows! How does this relate to segmentation in the software market? A very similar situation albeit in a B2B rather than B2C market, is the ERP software market. The ERP market is also a very large, horizontal market–a mass B2B software market, if you will. Just about every company in the world needs some type of ERP software to run its business, from an entry-level, basic accounting application like Intuit’s Quickbooks all the way up to very expensive, complex enterprise suites such as offered by Oracle, Microsoft, SAP and Sage.

This of course is one form of verticalization–segmentation by target customer size and sophistication. Intuit and Oracle aren’t targeting the same segments. But the ERP market is so large that over time it has also segmented by industry; nearly every industry group of any significance now has ERP software vendors with specialized applications aimed at a narrow industrial segment.

Another similar example is Medical Practice Management Software. The last time I looked, there were over ONE THOUSAND software vendors with products targeting this very large market. You would think the software requirements of most medical practices would be pretty standard across the board. But because the market is so large and lucrative, nearly every market segment (Surgeons, Gynecologists, Dentists, Chiropractors, etc.) has it’s own sub-market of competitors, with applications that speak that particular medical practice’s lingo and strictly models its business processes.

I have a personal example from earlier in my career that illustrates how important segmentation can be as part of a software company’s overall strategy. I took over as CEO of an early stage mapping software company with excellent technology but an unsophisticated business strategy. While the company had a neat technical advantage over its larger competitors, the product otherwise was positioned directly against the market leaders in that space. The primary distribution channel for the mainstream mapping products of the time was computer and electronics retailers, a notoriously tough and expensive channel. I was able to make some headway in penetrating this channel. But even with our technical feature advantage it was already too late in the game and we lacked the resources to compete and win head-to-head with the larger market leaders of that time.

So we quickly came up with a segmentation strategy that proved quite helpful. Initially we took out some features away from our primary product and created an entry level product priced far below the mainstream mapping products. This allowed us to occupy the price leader position targeting the most price-sensitive consumers, and distribute through both consumer/gaming software stores of the time as well as mass market retailers such as drug and grocery stores. The mainstream mapping software players had almost no presence in these channels due to their higher price points. This entry level product, created with minimal development costs, allowed us to generate cash flow to fund our longer term segmentation strategy which was to target the B2B market. The mainstream mapping products were fairly generic and used by business people as well as consumers, but really designed for any consumer with no business-oriented features to speak of. We were able to create a premium, business-focused version of our product which we positioned as the mapping products for mobile workers/road warriors such as sales reps and service technicians. We included important business-specific features, such as integration with the popular CRM systems of the day, which weren’t found in any of the other mainstream mapping products of the day.

Important considerations in segmentation strategy

Hopefully we’ve established that segmentation of your software market can be a very powerful tool to compete with and outflank strong competitors and ultimately maximize the value of your business. So what are the important things to consider in formulating your segmentation strategy? Let’s look at a few:

Horizontal vs. Vertical – The first thing to consider is how horizontal your segment currently is and how vertical you think you need to be to compete effectively. There is a fine line here; the more horizontal you can remain (targeting multiple segments with the same product) the higher your product’s ultimate profit potential. But you must be realistic about your market position–go as “vertical” as you need to win–or your profit potential is likely zero!

Market Maturity – The more mature the market is when you enter, the more likely it will be important to segment smartly and attack a vertical niche. Of course this or any single factor shouldn’t be used in a vacuum to create a strategy–many factors need to be considered in your segmentation decision.

Market Size – The larger the market size, the more likely it is that it’s ALREADY segmented and will likely force you to do the same. There are several prominent potential exceptions here, listed in the bullet points below.

Market experience of the company - Do you know the market well, and just as important, are you known by the market? In cases where you’re known and understand your market well, it raises your odds of success even entering with a more horizontal approach.

Levels of funding – Big companies with massive resources or heavily funded startups may be able to successfully  use a horizontal approach, although many confident late entrants of this type have failed in a variety of software market categories.

IP/Technology & other strategic advantages – A true innovator with market changing IP may also be able to attack and win in an established market using a horizontal approach, as they are effectively changing the ground rules of the market. But again, I’ve witnessed many companies very confident in their technical advantage that have ended up with their hats handed to them when competing head on in an established market.

Important upfront decision–but never too late to change

Like any important business consideration, it’s far better to optimally segment the market for your products up front then to wait until you are FORCED to do so. But just like a morning TV show, in the software business it’s relatively easy–at least compared to other technology categories such as computer hardware or semiconductors– and almost never too late to modify your target segments.

What’s your feeling on how best to approach segmentation in the software business? Post a comment so we can all benefit from your experiences.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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Is Your Tech Business Marketing or Sales Driven?

Software and hardware business are often segmented by the vertical or horizontal market they’re targeting, their technology platform, small vs. large companies and so on. One of the important ways to segment tech businesses, which isn’t often discussed, is by whether the company is sales-driven or marketing-driven in their customer acquisition strategies.

A balanced approach

Now some reading this article may ask “why wouldn’t you take a balanced approach”? Indeed, I don’t mean to suggest that either sales or marketing should be absent in the customer acquisition efforts of tech companies. There are a few scenarios that could be drawn up to support such a singular approach—but very few for sure. There are also some situations where the customer acquisition circumstances are “in between” in price, complexity, market size, etc. and you end up with a fairly balanced approach between marketing and sales. But in my experience the sales or marketing function will rise to the lead, more often than not.

Key criteria in choosing customer acquisition techniques

There are several considerations that often drive whether marketing or sales will dominate:

  • Product Complexity – This often decides whether or not a product can be truly driven to purchase by marketing or whether significant sales rep intervention will be required to close a deal. It should be noted that when product complexity is high, marketing support in the form of sales tools (examples: case studies, road map presentations by product management) will still be very important in the sales cycle. But this will generally be a sale that is driven by the sales force with marketing in a supporting role.
  • Product Price/ Typical Sale Size – The smaller the product price and typical sales size, the more likely you’ll be able to acquire customers exclusively through marketing, or in conjunction with inside sales that is largely “taking orders”. Conversely, products that cost a lot may require the extra interaction provided by an outside sales force (and the deal size also justifies the cost of the sales force).
  • Market Size – Very large markets with lots of customers are more easily and cost-effectively reached with effective marketing. A tight market with a small number of total prospects (think nuclear power plants) will usually be served almost exclusively by an outside sales force with minimal marketing intervention.
  • Use of Channels – While companies selling heavily through channels often need reps to call on the channel partners, far fewer channel reps are required than if the reps are dedicated to direct selling. Generally the heavier the use of third party channels in the customer acquisition approach, the more heavily the mix will lean toward investment in marketing.

Marketing driven keys to success

  • Adequate marketing funds – If you’re going to be marketing-driven in your customer acquisition approach, you better dedicate enough money to fund marketing programs with superior performance. To do otherwise will cripple your business.
  • An objective, data driven culture – The beauty of a marketing-driven approach is that it can take much subjectivity out the management of optimizing your customer acquisition activities. Especially in this era of highly measurable online marketing, decisions should be made on what the data says—not on the whims of the CEO or some other senior executive.
  • Excellent inside sales in support – Except for very simple, low cost products where marketing can truly drive the sale all the way to completion—these days that often means a software download, SaaS signup or physical product order—it’s still important to have an efficient (but low cost) inside sales operation supporting your marketing machine.

Sales driven keys to success

  • Great sales people – Hiring good people is so very important in every area, but when your relying on an expensive outside sales force to drive revenue—you better hire the best reps you can afford and attract.
  • Success driven comp plan – If your success depends upon them, make sure your sales reps become really happy only when the company is happy as well.
  • Good marketing support in the form of lead generation programs and sales tools – Unless you have a tiny market with obvious, easily identifiable prospects, it’s still very important to have a marketing function which generates leads as well as supplies good sales tools.

The best approach isn’t always chosen

Unfortunately, logic and situation analysis doesn’t always win out when designing a customer acquisition strategy. Usually by the time a company grows to be large, their approach is in line with what’s best for the business. Of course, your chances of growing to be a big company are reduced if you make serious errors in sales and marketing strategy. But in any event, by the time a company is big they are usually utilizing both sales and marketing heavily and in the proper balance.

Startups and early stage companies are another matter. Often the emphasis on either sales or marketing is based on the experience of the founders and senior executives. If they’ve been successful in the past and their new company has a similar focus, maybe it’s fine and their approach works again. But a problem occurs when these executives start up a very different type of company than they’ve had success with in the past. It’s human nature to fall back on what I refer to as your “common business sense”, which is formed by your personal background and past experiences. This is when you can get a misalignment between what a company needs and the approach taken in the sales & marketing mix.

Even worse still is when the customer acquisition approach develops more or less haphazardly. This can happen when the founders of a company really don’t have much functional experience in sales or marketing. This occurs somewhat frequently in software and hardware companies, as many startups are created by technical types. In these cases there may be a fairly unsophisticated approach to both sales and marketing—and whatever works early may end up dominate. For example, a sales rep is hired who has some success, so the model becomes hire a lot more reps and turn them loose without much (or any) support on the marketing side. Or an early direct email campaign or online advertising generates some sales, so money is poured into that method. Unfortunately, these may not be the best approaches strategically for the business in the long run.

That’s what I think about Sales vs. Marketing driven orientations in software and hardware companies. What do you think? Post a comment with your own opinions or stories about what drives customer acquisition in high tech companies.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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Structuring a High Tech Sales Force

There are many ways to organize a sales force. In my opinion, there is no one “right” way. There is only the BEST way for unique circumstances of your current company.

Like most aspects of developing a software or other technology-based company, there are guidelines, but no exact roadmap to building a successful sales force. In my practice at PJM Consulting, I often suggest that a management exercise like structuring a sales force should begin with a series of questions:

What stage of development is your company in?
This important, because an early stage company may not have the resources to fully fund the outside sales force that may be ideal for its situation. Or the company may want to sell primarily via an inside sales force, but hasn’t had enough early success or nailed down the sales process sufficiently, to sell effectively through this less “high touch” method. Stage of development can be as important as what the ideal “steady state” organization would look like–don’t over shoot your development stage in designing your sales organization.

What are you asking your sales force to do?
Are you using your sales force primarily as closers, supported by strong marketing, etc — or will your sales force be doing a lot of cold calling, handling the customer “cradle to grave”? In general the more you are asking your sales force to do, the more “high touch” the structure needs to be.

What markets are you targeting?
In some markets (such as many enterprise IT market segments) an outside rep knocking on the customer’s door is absolutely expected, and essential. In other markets (like many SMB markets), this type of attention would be considered a nuisance, not a service. It’s important to understand what the target customers want and are expecting in a sales interface.

What are your product price points?
The implications of this question are usually well understood. High priced products can support a more expensive outside sales force and may require one to make the sale. Lower priced products can’t usually be sold profitably this way and an inbound or outbound telesales operation is often the optimal structure.

Is your product more of a commodity sale, or is there a longer, more complex sales cycle?
Commodities lend themselves to lower cost inside sales, as well as a higher mix of channels. The more complex your sales cycle, the more likely your company will need a captive, outside direct sales force to serve at least part of your market.

This is just a sample of key questions to ask yourself as you design your sales function. There are many more relevant questions that should be asked, depending upon the specific situation. I won’t attempt to cover them all, or this article will become a book. Once you’ve done a good job of asking and answering the relevant questions, it’s time to actually start designing your organization. Below are some of the personnel types and organizational structure that a software or hardware company would typically consider as part of its sales organization:

SALES REP TYPES

Outside Reps
This is the classic sales rep style that has been around since the beginning of time. In the “old days” even consumer products were often sold this way (those of a certain age can remember the “door to door” Fuller Brush Salesmen). But this is the most expensive form of sales person, and depending upon the market, products and other factors, is not always the most efficient or even effective. There are still a lot of companies that sell almost exclusively through outside direct sales forces. But in many companies where they direct outside sales reps do exist, they are often used more sparingly, in combination with other types of reps and channels.

Inside Reps
This is a favorite form of rep for commodity products, companies that sell heavily through third party channels, and inexpensive, higher volume products. Inside reps can also be used effectively in a “teamed” approach with outside reps, helping to optimize a territory. They may source or qualify leads for the outside reps, handle smaller accounts in the territory or generally act as a “junior sales rep” to the more senior outside reps.

Hybrid Reps
This rep type is more or less of my own invention (the term is at least). This rep is part outside rep, part inside rep. A rep of this type would be appropriate for those “tweener” products and markets, which don’t fit neatly into a pure inside or outside model. For example, software products with an average sales price of $5-10,000–too low cost to be sold strictly through an outside sales force, but maybe too complex or expensive for a pure phone sale. Hybrid reps spend most of their time in the office on the phone, but also travel modestly, maybe one trip/month. Example “core” reasons for trips might be to staff trade shows, visit channel partners and call on major accounts–then filling up the rest of the week with additional sales calls.  This type of rep may be very appropriate for early stage companies that can’t yet afford to build out full inside and outside sales organizations.

Sales Managers
This is pretty self-explanatory, but not every tech company can afford a classical, full-time sales manager. Often you will see individual reps reporting to a manager of another function in startups, and occasionally you will see the concept of a “producing manager”, who has line sales responsibilities in addition to management. This personnel type is very important to setting the tone for your sales organization, and is applicable to managing all rep types within any organizational structure.

Sales Administrator
A specialist that you tend to see in larger sales organizations, or at least those that have a lot of complexity (a lot of return activity, inventory management, repairs, rep splits, etc.)

SALE ORGANIZATION TYPES

All of the organizational types listed below can be commonly found as the dominant sales organizational type in many companies, as well as in combination with each other in larger, more complex companies:

Region-specific organizations
This is probably the most common organizational structure, which may include any of the sales reps types listed above, who are assigned to specific territories. In many cases I favor this arrangement, as it tends to be the most unambiguous to measure and manage. The downside is that certain regions can prove to be much more naturally fertile than others, which can make the management process more difficult to perform fairly among the reps. You also may lose the advantages that certain reps may have in terms of contacts or vertical market knowledge which lies outside of their geographic region.

Channel-Specific organizations
This is the second most common sale organizational type which of course tends to be found in companies that make strong use of third-party sales channels. There may be a direct sales force, a VAR or retail sales force, an OEM sales force, and so on. Sometime there is an “intermixing of these organizations, for example, an “overlay” VAR channel rep as part of a direct sales force.

Industry-specific organizations
Likely the least common of organization types, but one which is very appropriate in certain circumstances. For example, a tech company which has very different value propositions in a number of vertical industries, where “insider status” in important to selling into a particular vertical market, or the product offerings are arranged by vertical market.

SUMMARY
There are many possible sales organization types and styles for software and hardware companies. Many different ways of organizing can work–and the people you have are always more important than organizational structure to your ultimate success. But by carefully considering your company’s specific situation and matching your organizational structure to your market, products and available resources, your company will have the best chance of achieving sales optimal results.

What do you think about the optimal way to organize a tech company sales force? Post a comment with your own advice.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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Structuring Channel Discounts for Software and Technology Companies

Selling through sales and distribution channels of various types is very important to many software and hardware companies. Yet channel programs and specifically discount structures, are often thrown together quickly and haphazardly, without looking at any real hard data. Let’s examine some of the key items it’s advisable to consider when structuring a channel discount program:

Market Norms
The absolute first place to start when considering channel discounts is to survey the SPECIFIC market that you are entering. By this I mean look at similar products being sold through the EXACT profile of channel partners you are considering selling through. For example for consumer software, retail margins of 15-18% are common, whereas for a specific VAR segments the discount norms may be in the 25-40% range. If your discounts fall too far below the market norm, your program will likely fail. If discounts are set much higher than the market norm (without good reason) your company will be leaving considerable profits on the table. It is very important to do upfront research on actual conditions in your segment–don’t just “assume”!

Preferably, you will want to find out what your direct competitors are offering in terms of a channel program. This may seem obvious. But I see often in my consulting practice at PJM Consulting many companies using their own theories or experience from their past to ascertain what the right discount structure SHOULD be, instead of using objective data gleaned from the current situation.  This often ends up being the main reason for a painful “restart” of their channel program at a later date.

Product and Pricing Strategy (Street Price)
Channel discount structures cannot be constructed in a vacuum. They are but one component of your overall product, pricing and distribution strategy. As such, they must be consistent with the overall goals you establish for the product. If you are seeking to penetrate a new market or a new channel, it may be wise to be more aggressive than the market norms to gain market share and shelf space. If your market is more mature and you are in a harvest mode on a particular product line, it may be wise to minimize channel discounts to maximize profitability. In any event, consider channel discounts early in any product planning phase as part of your overall product marketing strategy.

Type of Channel
There are many different types of partners for software and hardware companies that fall into the category of “channel resellers”. Computer/electronics retail, mass market retail, Value-Added resellers (VARs), Systems Integrators (SI), Domestic Distributors, International Distributors, Manufacturers Reps–and many more. Each of these reseller types are quite different from the others, and each add different types and levels of value to your distribution systems. Yet every one that you distribute through will be competing with the others (as well as your direct sales model), at least indirectly.

Multichannel Pricing Equity
It’s important if you are selling through more than one channel (including direct sales) to attempt to equalize, as much as possible, the street prices charged by the various channel types. The best way to do this is to use a “value-based” approach. A simple way of doing this is to consider the costs incurred by the various types of resellers in delivering your products to the target customer. For example, a VAR that provides support, pre-sales consulting and other services may need a higher level of discount to achieve an adequate profit margin than a retailer that simply is providing shelf space might. In reality, the retailer is likely to have a lower street price, but it is important to try to minimize this gap. Otherwise the VAR who may be providing important value-added services to a segment of your customers may be driven out of the market, and refuse to sell your product–which is not in your company’s interests.

The most common practice which causes inequities in channel pricing is a volume-driven discount model. New entrants to the channel often use this approach–why wouldn’t you want to incentivize volume sales by giving the biggest discounts to the largest volume sellers? Although this may work fine if you have a monolithic reseller channel, where all the players have the same business model and offer the same value add, it otherwise will quickly cause the problems discussed here. The resellers possessing the lowest cost structure and providing the lowest value-add will quickly dominate the market, driving the high-cost/high value-add resellers away. This may be ok with you; just make sure you explicitly consider this possibility before embarking on a volume-driven channel discount strategy.

Value Added
As mentioned above, one of the things that I recommend considering explicitly up front is: what is the key value-add that you are seeking from the channel? Is it pre-sales consulting, installation services, post-sale support, shelf space and inventory for immediate customer access, or one of many other factors? Make sure you understand which channel value-adds are most important to you, and build protections into your discount structure for the reseller type who best provides this value.

Components of Discounts
It’s not always necessary (or wise) to offer a single, monolithic discount level for resellers. How you structure your discounts components should be closely tied to your product and pricing strategy–what you are trying to accomplish with your overall channel strategy. For example, if you are trying to manage your street price at a certain level, it can be dangerous to offer a large discount to certain types of resellers who may pass that discount on as a lower street price. Yet this segment of resellers (for example, retailers) may be an important, high volume channel for your product type. In this case, it may be wise to offer additional, conditional discount for activities that you value.

As an example, to keep your street price up but incentivize a high level of activity through retail, you could offer a high level of added discount for approved co-op marketing activities. A segmented discount structure driven by costs and value-add, rather than volume, is often the most effective structure to maximize multichannel sales. This will also limit discount-driven reductions in street price, which ultimately can severely reduce profit levels and incentives to sell, affecting both the vendor and all channel partners–if not properly controlled.

SUMMARY
Creating a Channel Discount Strategy and structure is NOT a theoretical exercise. It should be primarily a tactical exercise based on a realistic view of market conditions, and include collection and analysis of objective market data. While what you hope to accomplish with your discount strategy is important, the overwhelmingly most important factors in creating your discount strategy should be what is happening in your segment of the channel–and what will work best for your company. Try not to create a structure based on what you’d like to see with respect to the channel. Focus on creating a pragmatic, workable strategy upfront to avoid an unsuccessful channel entry and painful restructuring that results. If you are new to the channel game, seeking outside assistance may help you avoid experiencing one of these painful false starts that happen frequently in the channel.

That’s my view of how best to create a channel discount structure. I welcome you to post a comment with your own thoughts on this important technology management decision.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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Competing with Entrenched Software & Technology Industry Giants

A few years ago I was reading an article in the business section of our local newspaper about a new Search Engine name CUIL (pronounced Cool). I already knew about CUIL, because I had noticed that it had just recently indexed the PJM Consulting website. One of their claimed differentiating factors was that they’ve their search index was twice as large as Google’s is. In addition, they believed that they had improved the ranking algorithms, and they also present the results in a different way. The results offered fewer results per page, but more comprehensive information on each site, and often included a photo or other graphic. The premise of the article was that it could have a chance to be a real competitor vs. Google, or at least Yahoo and Microsoft for market share in the huge search business. The founders had impressive pedigrees and came from Google on the technical side.

While the article gave credence to the possibility of CUIL being a potentially serious competitor to Google, Yahoo and MS, it also pointed out that quite a few companies have attempted to enter this fray, creating barely a blip in search engine market share to date.

I took a quick peek at CUIL at the time–the presentation was definitely different and possibly superior for some tastes. But in my quick look I wasn’t terribly impressed with the relevancy of the search results. No matter how you present the data, the relevancy of the results is paramount in search. I stuck with Google, as it appears just about everyone did.

Did CUIL meet with any success at all? Well, they’re no longer in business, closing up shop in September 2010. They were barely around for two years. They’re took on what is arguably the most powerful technology company in the world today, attempting to compete with them in their core area of strength. So you can’t say that the odds of success were high, which they rarely are for any startup. And this might be the ultimate tough market to enter at this point. Microsoft has continuously poured money into competing with Google with little success, most recently with BING and the partnership with Yahoo. But this IS the technology business; everyone gets at least a puncher’s chance. The key to survival (if not success) is usually how well the  execution is, and it didn’t appear that CUIL executed very well.

But execution aside, what’s the best way to go about competing in the software and hardware industries today? Should you just steer clear of the elephants of the industry? Many believe this is prudent, but I think it is not always necessary. Well, maybe going directly at Google’s search engine isn’t the best bet! But it wasn’t so very long ago that is was nearly impossible to get a venture capitalist to fund a company that was perceived to compete in a category with Microsoft (which could be viewed as MOST categories of the software business). Yet a short time later, Microsoft is considered in many ways a dinosaur, one that is quite beatable (don’t get the impression that I’m writing MS off–I’m not. Redmond is doing fine and could still rise again).

If it isn’t insane to compete with the giants, what are some best strategic practices that an early stage tech company can adopt to give it the best chance to survive and thrive, when entering market categories with large, entrenched competitors?. Let’s take a look at a few ideas:

Make sure that you can differentiate – This would seem obvious for any business, but when you are going up against a huge company with a good brand–well, don’t even try it without significant differentiating factors. They don’t need to be product related, necessarily–it could be free and outstanding support, better (cost-driven) price points, exceptional ease-of-use or many other things. But don’t kid yourself–you will need REAL differentiation.

Pick a niche, any niche–at least to start – It is important to pick a tight enough niche so that you can provide that true differentiation discussed above. Your investors may want you to attack a huge market, but if you don’t have that influence pushing you in that direction, pick a smaller area that you can have a better chance of dominating when you’re new. If you are successful in your initial niche, you can then broaden out into adjacent segments. Down the road, maybe you take on the giant “head-on”; but starting out is NOT the time for this.

Raise more money than you think you will need – Every once in a while a new company will “hit on all cylinders” from the very beginning. But in my consulting practice at PJM Consulting, I rarely see this. In fact, part of my practice is helping companies “pick up the pieces” after their initial business plan or execution has gone awry. No one likes to give up more equity than they need to, but things usually take longer to start working than you initially project. There are usually too many things that you don’t know until you really get into the marketplace. Plus, it’s generally easier (and cheaper!) to raise a bit more money at first than it is after that first misstep. A little extra funding in the bank can be a good insurance policy against a capital crisis early on.

DON’T try to be like them - A common mistake that I often see early stage companies make is trying to “be like the giant competitor”. Sometimes this comes from an inferiority complex, and sometimes because the founders come from one of the giant companies themselves. The last thing you want to do is create a big company bureaucracy. In most ways, you want to operate VERY DIFFERENTLY from you huge, slow-moving competitor. Resist the urge to create huge amounts of process before your company size dictates it as necessary. Be very careful about hiring away senior executives from you giant competitors, unless you are certain that they also have successfully operated in an early stage company before. Stay as fast and nimble for as long as you can–that is a primary advantage at this stage of a company’s development.

Recognize the giant’s execution weaknesses and beat them there – Analyze the large competitor’s business, and try to create your differentiation where they are weakest. It could be faster customer service, better channel relations, better ease-of-use, etc. If you concentrate your differentiation where they are doing the poorest job, it will accentuate the difference to the marketplace, and you will have a better chance of your advantage being recognized.

Focus, Focus, and Focus – This advice can be viewed as the culmination of the points above. Make sure that you don’t try to do any more than you can do EXCEPTIONALLY WELL at this stage. You can always expand your focus later. Remember, there is a good chance we would all be speaking German if Hitler hadn’t prematurely opened up a second front with Russia in World War II. The tech landscape is littered with companies that followed an analogous strategy, with similar disastrous results (Novell and Netscape are two former high-flyers that immediately come to mind).

SUMMARY

As an early stage company entering a market where a major company or two are the known leaders, make sure that you don’t “bite off more than you can chew”. You can always expand your focus after initial success. Contracting your focus later is usually quite a bit more painful, and many companies don’t make it through that transition. That’s my advice on how to attack a large, entrenched competitor. As usual, I’d be interested in seeing your comments–post them below.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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Retail Distribution of Software Products

Selling software at retail at one point in time was the “Holy Grail” for consumer, home office and small office software suppliers. That’s where the volume was. Everything that a company did starting up was intended to build enough volume to get into a distributor, so they could then pursue shelf space at the major retailers of software.

But oh, how times have changed. The advent of the Internet and wide availability of broadband has made nearly every consumer and small business application downloadable with the click of a mouse, and a major credit card. In the meantime, major sellers of software have dropped like flies (CompUSA, Computer City) or have de-emphasized software in their retail assortment.

PROFITABLE retail distribution of software, which has been a major challenge for software companies dating back more than 20 years, has gotten tougher every year, as the retail distribution pipe shrinks. And even twenty years ago, it was already very tough, for small software companies, in particular. I’ve even seen a credible authority recently predict that distribution of software through retail outlets will CEASE TO EXIST within five years.

IS RETAIL SOFTWARE DISTRIBUTION DEAD?

So should you forget about retail as a potential distribution channel for your consumer or SMB software application?

First of all, it’s my opinion that the near term extinction of retail software distribution is greatly exaggerated. While it has been in decline for a very long time, and will continue to decline, it still has some life left. There is still quite a bit of software sold at retail. There are still some reasons that people buy at retail. And last but not least, nearly every thing in high technology takes more time to “go away” than the pundits predict. People just don’t change their habits that quickly, no matter the technological reasons for that change to occur. Among several reasons people still buy at retail:

WHY PEOPLE STILL BUY SOFTWARE AT RETAIL

Impulse – They are in a store looking for something else, and happen upon a product that looks neat or useful. In this respect, software benefits from this “in-store effect”, much like any other retail product.
Credibility – Buying software, or any other item over the Internet from some unknown company, is scary for many people. Just the fact that it’s in a “touchable” package, and is “blessed” by the retailer stocking it, gives comfort to many, especially the mainstream and late adopter types.
Physical Media – Most folks want a backup copy of the application which they’ve put out good money for. Sure, you can burn a backup CD on your own. But to some folks that’s technologically challenging–and seems like a lot of work to others.
Internet Phobia – There still are folks, more than want to admit it, that just aren’t comfortable with the Internet, particularly the ecommerce aspects.

WHEN SHOULD A SOFTWARE VENDOR CONSIDER RETAIL DISTRIBUTION?

So in some cases, software vendors should still give consideration to packaging their products for retail distribution. What are the elements which may make retail still a viable distribution channel for a particular product line?

* A VERY hot product – In one of these rare instances where you’ve hit a product home run, it’s beneficial to get your product in as many channels as possible. When you have a product “selling like hotcakes”, retail can be ideal to help you maximize your return on the high demand. Make sure that you’ve proven that it’s a brisk seller via other marketing and distribution methods BEFORE you enter the retail channel, however.
* A well-known brand – Almost nothing helps product sell through retail as much as a well-established brand. There is almost never anyone to “sell” your product in a retail store. You are relying almost soles on the box copy to be your salesman. In this situation, the credibility of a strong brand is often the difference between a customer purchasing, and leaving the box on the shelf.
* A related portfolio of products that can be sold to the same customer. It is very hard to make money on a single product being sold through retail channels. The upfront marketing programs and thin margins make breakeven a huge challenge for a single product company. However, if you can profit indirectly even if you just break even on the actual retail sale, by building your customer list and selling related products to them–that’s a huge advantage.
* Add-on services to sell – Much like having a large portfolio of products, a single product vendor can also have a greater chance at profitability if the “retail product” is a front-end to other revenue generating services. Maybe the product leads to subscriptions to an add-on web-based service, or there are custom forms or other tangible supplies that can be sold to users of the software application.

These are a few of the circumstances where I would actually encourage an ISV to consider retail distribution. I want to caution that in the best of circumstances, this channel isn’t for the “faint of heart”. Startup costs are high, margins are generally lower than other forms of software distribution, and there are substantial inventory issues and risks. There’s an old saying in the software business about retail distribution–”the only people who make money at it are the freight companies who ship the inventory back and forth among vendors, distributors and retailers”. In short, it’s a great place to lose money–if you aren’t careful. I highly recommend that you retain an expert to help you through the process, if you are new to retail and decide that it may be appropriate for your products.

There are many more angles to cover on this topic. To name a few, the need for a relationship with a major distributor of software to retailers, what marketing programs to use, the importance of a retail package–and much more. As important as they are, we’ll have to leave the detailed mechanics of getting your software into retail distribution (and making a profit!) for a later article.

SUMMARY

So don’t dismiss retail distribution of your software applications completely, even in this age of Internet instant gratification. But make sure that you are doing it for the right reasons, with a solid plan for how it will benefit your company. If your company is entering retail for the first time, consider retaining an expert to reduce your risk of failure.

I’d enjoy hearing your own experiences with retail distribution, past and present, as well as your attitude about this channel today. Post a comment so we can all learn from your experience.

Phil Morettini
PJM Consulting
www.pjmconsult.com

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High Tech Market Research for New Products

One of the biggest problems in High Tech businesses is that a “technology-driven” approach that tends to predominate, especially among startups. This shouldn’t be a surprise. Much of this occurs because many founders of software and hardware companies tend to come from an engineering, programming or other technical background. While this enables a strength in creating a flow of technical innovation, it can also cause a problem when companies are planning new products aimed at a new market.

Everyone has a tendency to focus on what they know best; that’s just human nature. Folks spend more time on the issues that they enjoy, are more comfortable with, and are more confident about their ability to make good decisions on. Things that don’t fit into this category tend to be put off, or given short shrift.

In technically-driven companies the result is often products which are well thought out from a technical viewpoint–but much less well so from a “meeting market needs” perspective. While both are very important, the market perspective is absolutely critical in the initial stages of a new product.  So what’s the right approach to product planning-focused market research?

When Should The Research Should Be Conducted?
The answer to this is early, often and forever. The earlier you start prior to design or coding, the more time you will have to obtain the most accurate picture of the market that’s possible. Sometimes there are practical limitations to how early you can start–Trade secrets and patent filings, for example, or the lack of a prototype which may be considered crucial to receiving realistic market feedback. Within these limitations get out and begin interacting with the marketplace as soon as practical. And don’t ever stop. Markets, especially the software and hardware variety, are like living organisms. They are constantly growing and changing. What may be true in the early phases of a market could change dramatically over even a short period of time. Companies tend to develop an internal “common sense” that is used in making decisions which is based upon past inputs. That common sense serves you well in relatively static markets, but can work against you when conducting product planning in a dynamic market.

Who Should Do The Research?
The best way to conduct this research is what I often refer to as the “two-headed monster” approach: one marketing person, and one technical person. Not a lone wolf if you can help it, and please–no committees. Quite often this would be a Product (Marketing) Manager along with the Engineering Project Manager who will lead the actual development of the project. In the smallest startups, it might be the technical founder and the “business” founder, for example the CEO and CTO, or CEO and VP Marketing. The Business/Marketing manager should be in the lead for this task, but it’s important to note that both camps have a role to play in this endeavor. There are two different perspectives on market feedback, and well as two different priorities in questions to ask. Having both parties involved (assuming there isn’t a dysfunctional relationship) usually leads to the most complete and risk-reducing result. In addition, it often eliminates arguments over priorities later in the process after development starts (and schedules inevitably begin to slip). If only one can be available, it should be the Marketing side–working closely with the Product Development/Engineering lead to make sure their input is included in the process.

How Should The Research Be Conducted?
This is a really broad question which  depends heavily on the situation. How much do you have available to you in terms of money, time and other resources? If you’re in a big company, you may be able to commission some objective research. If you are a startup with modest resources, it usually is an ad hoc exercise of visiting and interviewing potential customers, along with some background Internet research.

What’s most important to keep and open mind, and eliminate your own biases and pre-conceived notions. This exercise needs to be a search for the truth, not an attempt to validate your own theories. Also, make sure that you are talking to the right people. If you are planning a market-creating breakthrough product, you really need to be talking to Early Adopter types, not the guy or gal that only buys after everyone else they know. If you are introducing a product that is very similar to other products in an already large market–but maybe at a lower cost–by all means, talk to those mainstream buyers and even the late adopters. Use the current market phase to guide who to get input from.

It’s great if you have the money to do some formal secondary research, but be careful about confusing formality with accuracy. For example, I know of large companies that spend huge amounts of money on Focus groups, while their Product Managers only reluctantly talk to actual potential customers directly. I find this very dangerous (you might say stupid!). Particularly with breakthrough technology, you tend to find a “garbage in, garbage out” phenomena with professionally managed focus groups. But there is that formal, professional looking report that appears very convincing in the aftermath. Focus groups can be great if constructed properly, but I have seen a lot of money spent for a very bad result. If the focus group wasn’t run properly, or the technology is very revolutionary, the results can be total garbage covered in a beautiful wrapper. I always advise that  a good amount of old-fashion ad hoc research–informal individual discussions directly to customers–to be used as a sanity check, if not the main research technique. There are exceptions, of course. If you are doing incremental product research where the product is well-understood and the changes are evolutionary, objective research methods such as surveys may be a great way to get a quick and definitive read on the market’s reaction.

How Do You Know When You’re “Done”?
This really depends on what you are doing, but my general answer is that “you will know when you are done when you get there”. It’s important to not put an absolute time limit on the research, if it is at all practical. In some cases in the real world this isn’t possible, of course. Sometimes you just have to go with the information that you have gathered up to a set point in time, along with your market common sense, intuition, and gut feel. With incremental product releases, waiting may not be possible or necessary. But if you can avoid it, especially if starting a new company, division, or business area, resist the temptation to “go with what you have” if it just doesn’t’ feel right. In my experience, when you’ve “done enough” research to begin serious product planning–it’s obvious. You will feel very comfortable with regards to the clarity of the current market snapshot. You’ll feel you’ve really nailed the wants and needs of the market as it relates to the new product opportunity. Try not to get “antsy” and move forward because you’ve reached the original market research end date on your theoretical timetable. Resist that temptation and keep working until you are CONFIDENT that you are there, unless other factors just won’t allow it.

Summary And Conclusions
Make sure that you do sufficient market research before you begin building products. Product development on a developer’s gut feel is often a prescription for failure. There are a few high profile companies which have entered our folklore that were lucky enough to start that way, but more often this approach will quickly empty your pockets, rather than make you rich. Include both Marketers and Technologists in the Research if at all possible.

*Marketing should take the lead on market research for new products
*Always make sure you talk to at least some customers/prospects directly and informally
*By wary of formal “arms-length” market research results, if not supported by an informal research “sanity check”
*Make market research a continuous company function
*Try not to stop an individual product-oriented market research project until you are comfortable that you’ve got the correct answer.

There you have my thoughts on conducting market research for product planning purposes. I’d love to hear yours as well–post a comment with your experience and views.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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Channel Pricing Strategy for Software and Hardware Products

Pricing software products is always a difficult exercise. With high product development costs, but near zero costs of goods sold, there are many different strategies that people have followed successfully (and not so successfully!) over time. Pricing hardware products is a bit simpler because there is generally a significant cost of goods sold that acts as a governor on pricing behavior. But even with hardware, technology markets are dynamic and fast moving. And it’s a complex enough topic when all sales are going direct–once you bring channels into the picture, it only gets worse.

CHANNEL CONFLICT
The biggest concern most companies have when pricing for multiple channels is channel conflict. I have seen many companies who actually AVOID selling through channels for fear of the pricing implications it brings. They are afraid of a channel undercutting their direct sales force in price, and channel conflict in general, which arises as a result of different prices being presented to customers from representatives of different channels. But this doesn’t have to be so with a savvy understanding of the implications of pricing actions. This comes from both experience, and “paying attention to what actually HAPPENS in the marketplace. If you price properly and run your channel programs well, you can sell successfully via multiple channels–with these channels living in relative harmony.

VALUE-BASE CHANNEL PRICING
I’ve written about value-based pricing before in the context of the perceived value of a product, as seen by the end-user, being the guidepost for pricing actions. A similar concept exists for channel discounts. Rather than taking a simplistic approach and give the greatest discount to the channel players that move the most product ( a destructive strategy–more on that later), it’s important to measure how much “value” a particular channel provides both you and your end-user customers. Look at things like 24/7 support, inventory & product availability, technical/customization expertise, credit services, and the like. In this case it is helpful to let the cost of delivery of each of these attributes be your guide to the value they provide.

VALUE-BASED CHANNEL DISCOUNT STRUCTURE
For example, you may figure that the cost of a VAR providing 24/7 support to end users (meaning YOUR company doesn’t have to) is equal to 5% of the list price of the product. And the inventory held by a retailer (again, meaning YOUR company doesn’t have to hold it, at a cost) is equal to 2% of the list price. And so on and so forth. Using this value-based method, you can calculate the actual costs borne by your partners in delivering marketplace value, and use this as a guide in building your channel discount schedules for various types of channel partners. This value-based channel pricing approach is not well-known, and seldom considered; most people seem to figure the only value-add worth extra discount is sales volume. If you use a value pricing approach, you actually have a chance to build a multi-channel strategy that “clicks on all cylinders” by providing discount structures that are equitable based upon cost and value associated with each channel.

LIMIT VOLUME DISCOUNTS
If you choose the “more volume=greater discount approach, your multi-channel strategy is a house of cards which will soon collapse around you. One channel will quickly grow to dominate, and the other channel types will soon quit selling on your behalf and wither away. Unfortunately, this is the most common scenario seen in the marketplace for first-time vendors using the channel (and remarkably a lot of experienced practitioners as well).

THE GOAL IS TO MAXIMIZE SALES AND PROFITS THROUGH ALL CHANNELS
Again, the key is to not let one channel dominate. Ideally, you would like all channels to be presenting prices to the end customer that are equal. In reality, that pretty much can’t happen without price fixing (which some folks may be able to get away with, but that’s another story….). But you should strive as much as possible to have end user pricing equity for all channels. But this is where the counter-intuitive part of this discussion comes in to play. As discussed above, most people pricing high tech products have a tendency to price based upon the volume of product a particular channel player can move. It seems logical–why wouldn’t you want to incent and reward a partner with better margins if they are selling more products?

While this appears logical, it is actually penny-wise and pound-foolish. In fact, it is usually catastrophic to your plans to maximize sales through multiple channels. Let’s look at a simple case of how this often “breaks” a multi-channel strategy for a common case: a vendor selling through both retailers and VARs.

A SIMPLE EXAMPLE
Retailers provide a vendor with a point of purchase holding inventory, where their customers can go to immediately purchase a product. VARs often don’t hold inventory, but provide other services important to the vendor and many customers, such as tech support, training, customization and integration with other software and hardware products. Each of these channels may have an important role to play in the overall strategy to maximize vendor sales.

But the retailer will usually be a high volume partner, with the VAR less likely to be a volume outlet (although the VAR CHANNEL, in total, may hold great promise to move volume). If you structure your pricing by volume, the retailer will get better discounts. Because individual VARs generally have higher costs spread over lower product volumes, they actually need HIGHER discounts to stay even or close in pricing potential vs. the Retailer. This situation is exacerbated by the fact that retailers tend to be volume-oriented, usually accepting a relatively small, fixed margin on everything they sell. If you provide discounts based upon the volume that a partner moves, what will happen is inevitable: The retailer will take over your channel business, because the VARs will be “squeezed out” by the relatively low prices charged by the retailer. They won’t be able to make a profit on your products, so they will ignore the business, and you will lose the opportunity to realize significant sales through the large (in aggregate) VAR channel, especially those customers that desire the service and support they supply. I am oversimplifying this situation, of course, because VARs are more interested in the service revenue that a product can pull than they are in product margins. But I have seen this scenario play out many times and kill product sales through VARs channel that might otherwise generate healthy sales. This can be a heavy penalty for naïve technology product managers and other executives who are charged with pricing their products and moving them through multiple channels, but who don’t fully realize the consequences of their actions.

SUMMARY
Pricing seems pretty simple on the surface–it really isn’t and when channels are involved, it’s anything but. It’s important to fully think through the downstream effects of your pricing policies when multiple distribution channel are involved. Let me know if you have questions or post a comment with your own channel pricing stories that you’d like to share.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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Forecasting New Technology Products

Forecasting is a thankless job. It’s a lot like being a referee or umpire in your favorite sport; the only time a game official is noticed is when they do something wrong! Similarly, a forecaster’s primary aim is too stay out of the “news”.

Make no mistake, forecasting is a very important function in any business. In the software business, your whole business plan could be riding on meeting the forecast to fund growth and product development. In a hardware business, it’s even worse–you have to worry about creating too much or too little inventory–either of which can be a huge problem for your business.

HARD IN THE BEST OF CIRCUMSTANCES

It’s bad enough when you are trying to forecast an existing mature product in a mature industry. This is a difficult and complex task, using well known techniques such as smoothing, trending and seasonality to fine tune the next monthly or annual forecast.

Early in my career at Hewlett Packard I spend 4 months in a special assignment dedicated solely to improving forecast accuracy. The marketing department was engaged in an ongoing argument with manufacturing over inventory levels. Not surprisingly, manufacturing wanted the inventory levels to be lean, while marketing favored a more robust number. This was because manufacturing was being graded on their costs and at that time “owned” the inventory; while Marketing was graded on revenue–and low inventory levels usually lead to missed sales opportunities.

I became a Lotus spreadsheet guru and we used everything we could find to try to improve our forecast accuracy. Keep in mind that these were high tech products (computer printers), but successful product lines with significant historical data available. Try as we might, the best we could ever do was to get within +/-25% of the eventual unit sales number.

NEW TECHNOLOGY PRODUCT ARE THE WORST POSSIBLE SCENARIO FOR FORECASTERS

The main message here is that forecasting  any product in high tech industries is very difficult, from an accuracy perspective. Forecasting accurately the performance of NEW PRODUCTS in technology markets is nearly impossible to do accurately. When you add in brutal competition, a tight market research budget, vague notions of market size, an early stage on the user acceptance curve and often the reality of an unknown brand — forecasters of new technology products needs to make sure they don’t end up in substance abuse clinics. But of course, even though it’s hard– it’s still VERY important. So what’s a forecaster to do?

There are two basic methodologies that I typically utilize when attempting to forecast sales for a brand new technology product:

TOP DOWN FORECASTING METHOD

The first approach that I usually engage is the “top down” method. You might also call this the “Macro” approach. This is an exercise of defining the size of your total addressable market using market research or number of potential users, and also estimating what a reasonable share will be for your product — given the various attributes of your market position. To establish your share consider everything you can in your analysis: your marketing budget, brand strength, an unbiased view of how your product stacks up vs. the competition, etc. It may be helpful to put it all in a spreadsheet, and quantify the various important attributes of your company/product vs. your competition. Be careful about assigning too much precision to these numbers; remember that garbage in equals’ garbage out. But if you go through this exercise thoughtfully it can be very helpful in analyzing your relative market position. In this case, obtaining your top down forecast is then as easy as multiplying the share you think you can obtain times the market size that you came up via research.

BOTTOM UP FORECASTING METHOD

After I’ve done the top down or Macro forecast, I like to use a “bottoms up” or “Micro” approach as a sanity check. To do this, you want to gather information on what you think you can sell by canvassing individual stakeholders in the sales area: direct field sales reps, Online/Web store, dealers, international distributors, etc. It’s helpful to gather info from any channel that will be a significant contributor to sales for this new product. Usually it’s impractical to do a complete survey of everyone that may be involved in the sales effort. What’s important is to obtain a representative sample that is both broad enough and deep enough that the data you gather has some significance. At that point, you can “normalize” the data. For example, say you were able to gather data from a broad cross-section of sales points, totaling approximately 10% of the total sales infrastructure. You would then multiply the total number of units/dollars you obtained from your sales entities times 10, to reach a bottoms up forecast totaling 100%.

DO YOU HAVE CONVERGENCE?

The key to this exercise is to discover whether your two views of the market are close enough that they appear to be focusing on the same topic! If they do, you may be in pretty good shape with your forecast. If they are off by an order of magnitude, it’s probably time to reconsider some of your assumptions.

So there’s my advice on how to approach the unenviable task of forecasting a brand new technology product. It’s a high risk, high return activity under the best of circumstances–and ideal conditions are seldom found in this activity in the technology space. But if you are able to construct both a top down and a bottoms up forecast and the two numbers at least fall in the same ballpark, you’re probably on the right track.

Give it a shot yourself next time you’re faced with a daunting new product forecast. Feel free to shoot me an email with your questions, or leave a comment to extend this discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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Business Models in the SMB Market

The SMB market is typically a very popular topic for hardware and software companies. Of course, everyone wants to sell to the Enterprise market. But as a result, competition is fierce and standards are very high for these select large companies. If you get to the Enterprise market early, with an innovation that creates a new category, you can find success if you are TRULY making a contribution to the market. But late entries into a vertical market segment, as well as early stage companies competing with larger established companies often have a very tough go of it. In these situations, attention often turns to the Small and Medium-Size Business (SMB) portion of the market.

And why not? At first blush, the SMB market appears to be huge, as well as generally underserved. It looks like a perfect haven for an early stage or turnaround company with a solid product, but not quite enough differentiation, brand name, or marketing muscle to push out the big boys in the Enterprise space. So the decision is made to focus on SMBs.

What’s Wrong With This Decision?

There is nothing wrong with this decision, per se–if it’s done with eyes wide open and for the right reasons. But too often, it is done to run away from a problem (the inability to penetrate enterprises), rather than run to a great opportunity. A lot of times, companies see the SMB market as easier turf; simply a less competitive market with more targets than the Enterprise market. Major problems can result from this type of mentality, and I see it quite often in my consulting practice. Companies that enter the SMB market from this perspective usually aren’t fully prepared to do what it takes to be successful, in what is a very different type of market than what they may be familiar with. So where are the land mines in the SMB marketplace?

What’s Not Obvious in Marketing to SMBs

The first thing to consider is that customer needs are often quite different. A lot of this depends upon what technology and market segment you are in, and whether your product is aimed more at the “S” (small) segment, or the “M” (medium) segment of the SMB space. For example, if you are selling a single user productivity tool which is useful to staff accountants, you may not see much difference. If on the other hand you are marketing a company wide, networked application of some complexity, the differences may be huge. Like everything in technology marketing–the devil’s in the details. Every situation needs to be evaluated closely, and treated differently on its individual merits. The most important thing is TO NOT ASSUME THAT THINGS ARE THE SAME BETWEEN SMBs AND ENTERPRISES IN YOUR PARTICULAR CATEGORY. Do the work, evaluate the situation–don’t assume. Assumptions, without verification, are what get you burned in this transition. Below is a list of some of the major differences in the SMB market:

IT Departments are small and less of a factor–if they exist at all.–In Enterprises you may be dealing with persnickety CIOs that want things just so. In SMBs, if there is a CIO at all, he will be looking for an off the shelf SOLUTION that will “just get the job done”. Or you may end up struggling to figure out how you can sell your complex solution, to a company that has NO IT DEPARTMENT AT ALL.

There is less money to spend–It’s harder to make money with big ticket hardware and software, let alone customization and expensive services. Your products better have value – and margin – right out of the box.

Ease-of-use is even more critical–There probably is no training department or other corporate staff, and people are busier overall. If they can’t figure out how to use it quickly, you’re going to have a hard time selling it.

There is much less time available to purchase products–Even the sales process may be compressed, in terms of how much time the prospect spends reviewing your marketing literature, or talking to your sales people. The actual TIME ELAPSED during the sales cycle could be EVEN LONGER due to lack of time available for the prospect to consider your product, but the INTENSITY of the purchasing engagement is often much less.

How Do You Need To Structure Your Business Model Differently?

Lower prices– SMB’s just won’t pay the same prices that you can get in the Enterprise space in most cases. So you’d better come into this segment with a price and value proposition that makes sense to these price-sensitive customers.

Marketing vs. sales–The SMB market is more marketing intensive, with respect to marketing/sales ratios, than the Enterprise market. There are many more customers; the average sale amount is much lower, and much less face time available for direct sales. While in many respects Enterprises are the most demanding customers in the world, you’ve got to be a better marketer to succeed in the SMB space than you need to be in the Enterprise world.

Low cost sales force– With much lower average sales amounts, and much less time available on the customer side, it is usually impractical to have a large, high-cost field sales force. Inside sales forces are the general rule in this market. If you have a product that demands customization and hands-on support, VARs are a good adjunct to a sales operation to consider. The more your sales force is taking orders generated from marketing, and the less they are cold calling prospects, the better.

Better usability and reliability– You’ll need many more units being sold to get to the same level of revenue as in the Enterprise space. This will be across a much larger customer base with much less (if any) maintenance revenue to fund a large support staff. Your product better work when it’s installed and better be very easy to use over time. Unless you have a highly customizable solution and are using VARs as a channel, SaaS is a great platform for delivering software to this market.

Little or No IT support–The good news is that there is no often no prickly IT committee or staff that you have to “go through” to sell to the real users. The bad news is that if even the littlest thing goes wrong, there’s no one internally at the customer to pick up the slack–you’re going to hear about it directly from the user–over an over again.

Summary

The SMB market is actually a simplistic catch-all phrase for a large, heterogeneous group of markets. But it is a useful abstraction as a starting point for understanding how to penetrate and thrive in B2B marketing/sales to smaller companies. I hope this short introduction is useful–feel free to pitch in and post a comment adding to this topic.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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1 Comment by admin on June 10, 2007
filed in Business Models, Corporate Strategy, Distribution Channels, Pricing, Product Marketing/Management, Software/Product Development, Startup/Early Stage, VARs, enterprise software, sales
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