Business Models in the SMB Market

The SMB market is often a popular topic for hardware and software companies. Of course, first and foremost 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. But you need to TRULY make a contribution to the market.

Late entries into a large vertical Enterprise market segment, as well as early-stage companies competing with larger established companies often have a very tough go of it. In these situations, companies having difficulty getting enterprise traction often turn their attention to the Small and Medium-Size Business (SMB) market.

And why not? At first blush, SMB market segments appear to be huge as well as often under-served. It looks like a perfect haven for an early-stage startup or turnaround company with a solid product. But with not quite enough differentiation, brand name, or marketing muscle to push out the big boys in the Enterprise space. So a decision is frequently 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. 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. It is viewed simply be a less competitive market with more targets than the Enterprise market. Major problems can result from this type of mentality. 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. If they’ve focused on the enterprise previously, SMB 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 in the SMB market vs. the enterprise. 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. Take for example, if you are selling a SaaS individual productivity tool that is useful to staff accountants. In this case, you may not see tremendous differences from selling into a different company size when you move from enterprise to SMB. If on the other hand, you are marketing a company-wide shared 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. Do the work, and evaluate the situation specifically for your category. 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 relative to the Enterprise:

IT Departments are small and less of a factor in the SMB market

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 a cost-effective, off-the-shelf, simple  SOLUTION. One that will “just get the job done”. 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

With SMBs, it’s harder to make money with big-ticket hardware and software. Let alone customization and expensive add-on 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 in SMBs. They must be able to use it quickly. Or you’re going to have a hard time even selling it, let alone getting it used.

There is much less time available to purchase products

Even the sales process is often compressed with SMBs. Prospects may be major multi-taskers with much less time available to review your marketing literature or talk to your salespeople. But the actual TIME ELAPSED during the sales cycle is sometimes EVEN LONGER than with enterprises. With the lack of time available for the prospect to consider your product, the INTENSITY of the purchasing engagement can be much less.

How To Structure Your Business Model Differently for SMBs

Lower prices for the SMB market

SMBs 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 must be penetrated with a more marketing-intensive approach with respect to marketing/sales ratios than the Enterprise market. There are many more customers and the average sale size is much lower. Again, also much less face time available for direct sales. In many respects, Enterprises are the most demanding customers in the world. But you’ve got to be a better marketer to succeed in the SMB space than you need to be in the Enterprise world. Success is often highly sales-intensive with Enterprises. So think self-service SaaS in software, maybe VARs or retail in hardware.

Low-cost sales force

As discussed, SMB markets have much lower average sales sizes and much less time available on the customer’s side. Because of these factors, it is usually impractical to have a large, high-cost field sales force. Self-service, or at a maximum, an inside sales force is the general rule in this market. If you have a product that demands customization and hands-on support, VARs are an excellent adjunct to consider as an internal sales operation. 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 SMB units being sold to get the same revenue level as you would 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 must be easily installed and work once it’s installed. And it has to be very easy to use over time. Unless you have a highly customizable solution and are using VARs as a channel, a simple SaaS approach is an excellent platform for delivering software to this market.

Little or No IT support in the SMB market

The good news is that there is not often any prickly selection committee, or IT staff, that act as gatekeepers in your efforts to sell to the actual end users. The bad news is that not even the littlest thing can go wrong without consequences. There’s no one internally at the customer to pick up the slack. So you’re going to hear about it directly from the end user, over and over again.

SMB Market Summary

The SMB market is actually a simplistic catch-all phrase for a large, heterogeneous group of market segments. But it is a valuable abstraction as a starting point for understanding how to penetrate and thrive when targeting smaller companies. I hope this short introduction is useful and practical. Feel free to pitch in and post a comment adding your two cents to this important topic.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or Subscribe to the Morettini on Management Newsletter hosted by LinkedIn. Contact Phil directly at info@pjmconsult.com