One of the most annoying terms I come across every day is “SMB”. With the introduction of cloud and mobile, a variety of “out of the box” selling, productivity and marketing software that requires no installation and customization has significantly enlarged the IT market to include also businesses that cannot afford the very costly contracts of IT systems and marketing applications. This is in fact one of the most important growth trends of our entire industry. But putting “small” and “medium” under the same category? What the heck???
Gartner defines SMB as “A small and midsize business (SMB) which, due to its size, has different IT requirements and often faces different IT challenges than large enterprises, and whose IT resources (usually budget and staff) are often highly constrained.”
The attribute used most often by Gartner to define the size of an SMB is the number of employees: “Small businesses are usually defined as organizations with fewer than 100 employees; midsize enterprises are those organizations with 100 to 999 employees. The second most popular attribute used to define the SMB market is annual revenue: small business is usually defined as organizations with less than $50 million in annual revenue; midsize enterprise is defined as organizations that make more than $50 million, but less than $1 billion in annual revenue”.
In the EU and in some international organizations (the UN, the WTO etc.) the common term used is SME (Small and Medium Sized Enterprises) but they basically mean the same thing.
For those of us who have been involved in defining target markets and go-to-market strategies for startup companies, it is pretty obvious that “small businesses” couldn’t be more different from “medium size businesses” and combining them under the same definition leads to an awful lot of confusion, misunderstanding and mistakes. In many ways, medium-sized businesses are much closer to large enterprises than they are to “small” businesses.
For most of our analysis at Carmel of both dealflow and portfolio companies we often use the following classification system:
1. Small businesses: Businesses that don’t have a significant IT or Marketing department (if at all) are very cash constraint and usually they’re also not particularly tech-savvy. These companies are often able to pay only very little (maximum tens of dollars per month) and lack technical implementation capabilities. Therefore, in order to create a significant company that targets this segment, “scalability” becomes almost the only question at hand and the go-to-market strategy has to be completely “no touch”, “self-serve” or “infinite scale” (whatever your favorite buzzword may be). In many ways, selling to small businesses is like selling to consumers. Statistics also show that it is extremely hard to pull off (although companies such as Wix have done it very well).
2. Medium size businesses and enterprises: Surprisingly enough, mid-size businesses (if we use the Gartner definition) tend to behave a lot like Enterprises. They both have IT departments, procurement guidelines and professional end-users. In most cases they evaluate more than one option before deciding on a solution and like to understand pricing, product roadmap etc. It’s true that the size of the Average Sales Price (ASP) may differ due to the size of the organization and therefore result in variations in sales cycles, procurement processes, price negotiations etc. and therefore the necessary adjustments in the sales processes need to made, but a direct contact with the customer is required (whether inside or outside sales) and the quality of the sales force becomes the main success criteria.
3. Very large enterprises: Actually the big difference in go-to-market lies when you move from an “enterprise” to a “very large enterprise” (tens of thousands of employees) such as Tier 1 banks, Telco Operators, large retails chains etc. Those organizations are so big that they tend to have a distributed procurement policy (each department can choose its own tools), and cycles are very methodological and often progress from lab evaluation to PoC to trial period to training and finally full deployment. There is a need for multiple touch points into the organization and a very dedicated customer success team (even for “out of the box” SaaS applications).
To summarize, the classification of target markets and go-to-market strategies should be analyzed carefully. We all tend to “cut corners” in order to fit our strategy to pre-defined buckets. “SMB” is a wrong bucket. Differences between “small” and “medium” are too significant and total separation should be applied.