Large enterprises spend a lot of time selling to other large enterprises. It makes sense. After all, bigger firms understand each other, and they’re used to setting and spending correspondingly large budgets. Every so often, however, a large enterprise sours a bit on selling to its peers. The market is too competitive, they decide, too saturated with similar solutions and it’s too tough to take market share from entrenched incumbents. With that, these large companies set their sights on small and medium-sized businesses or SMBs. From the lofty heights of large companydom, these SMBs look a lot alike. For this reason, the large companies market and sell as if every SMB company is the same.
My experience running VistaVu has led me to believe there are four distinct segments within SMB. These four can be differentiated for sales purposes based on their interest in three issues: features of the product or service; price of the product or service; and relationship with the vendor. These relative buying priorities – features, price, relationship – are in turn driven by two factors: how these companies are managed and how they are funded. Here’s a quick tour through what I see as the four segments of SMB.
1. Independents: This is an individual or two, self-funded or family-funded (love money). They are technicians (one or two people and a truck) who are good at what they do and happy to keep delivering their service/product with minimal or no infrastructure. Because their spending is constrained by their revenue, they prioritize price above anything and are willing to spend more time and energy than dollars. While they care deeply about one-on-one relationships (which is how they built their business), their price constraints place them into centralized and often homogenized product/service offerings. Features are important but not as important as cost, so this group tends to eat what they’re fed. These are great clients for high-volume, low-cost business models. Familiar brands carry the most weight with this group. Typical software product purchases for this group are mobile, low-cost and ‘off the shelf’, one size fits all.
Priority 1 = Price
Priority 2 = Feature (point solution)
Priority 3 = Relationship
2. Owner-Operators: This could be someone who started out as an Independent and did well at it. He or she could have started as a welder with a single truck, got more and more work and eventually became the leader of a 30-person, 60-person, 100-person outfit. Their growth has largely been financed by internal cashflow and debt. Owner-Operator does not mean small. The company could be doing $5 million or it could be doing $100 million per year in revenue. It’s their buying behavior that places these companies into the Owner-Operator category. It’s the owner’s money and the owner draws straight lines between spend and return. Years ago, we were selling one of our SMB business management software products (SAP Business One) to an Owner-Operator business. It was going to be about a $100,000 sale all-in. We got the call on a Thursday from the second-in-charge to come in on Monday and pick up the check and the signed contract. The deal was all teed up. Over the weekend, we received an email directly from the owner saying there was a change in plan and they would not be buying software. The owner had been in Florida that weekend and he bought a $100,000 speed boat and wanted to put this software purchase on hold. To add insult to injury, he sent me photos of his new boat . . . it was a beautiful boat.
My experience is that features have the greatest importance with this category of buyer. They’ll buy a product that will do what they need it to do at this point in time. We call these point solutions (also called best-of-breed solutions) because they solve a problem at one point in time. For this market, it helps if your brand carries social currency like prestige or exclusivity. This group has money, they have done well. They will spend money on business assets easily and quickly if they can draw straight lines to the return. So their second, not their first priority, is price. (This is true to the extent that they don’t have to spend any extra to solve the problem. Finally, while every client will state that relationship is important (and it absolutely is whenever there are problems), they often vote with their wallet and put price ahead of relationship. Typical software product purchases for this group are cloud-based, configurable, industry-specific and disparate to other business unit solutions.
Priority 1 = Feature (point solution)
Priority 2 = Price
Priority 3 = Relationship
3. Professionally Managed Companies: These companies are typically funded by private equity, venture capital or a family office. With this equity injection often comes a professional management team (new CFO or supporting management). Their mandate is always growth and buying behavior is driven by this focus. Like Owner-Operator, their first priority is features. However, with the mandate and infusion of capital comes a longer time horizon to influence success. So they are NOT looking for immediate point solutions. Instead, they look for horizontal functionality, standardization, integration, scalability and extensibility (best of suite). This is a recognition of the ongoing changes that will occur as the company climbs through various business strata of growth and complexity on its way to a successful liquidity event.
How these companies buy is different again. They’re not playing with their own money, so they may be less price-conscious than the Owner-Operator, but they are playing with their own careers.Therefore, their second priority is relationship. Everything is a conscious decision around personal risk and corporate growth. They want to work with companies with a proven track record of success of helping companies like theirs grow. Unsexy brands that have been in the marketplace a long time, brands that are known and accepted, offer personal risk mitigation and have greater value in this market than the previous two.
Their third priority is price. While a cost justification needs to be made in every buying decision, they are more open to trying unique product sets that helps them differentiate their product to disrupt a market, increase client retention or increase profit — all of which gain greater multiples on valuation. If this product set comes with a higher price, their longer-term vision allows them to pay off this extra cost over time. Typical software product purchases for this group are cloud-based, configurable, extensible and integrated across business unit solutions.
Priority 1 = Feature (best of suite)
Priority 2 = Relationship
Priority 3 = Price
4. Subsidiary of Large Enterprise: A lot of SMB companies are owned by large, publicly traded enterprises. Their financing comes from the parent company. Although they appear outwardly similar to the Professionally Managed Companies, they buy quite differently. While they will have a growth mandate as well, they must often operate within the boundaries of a larger corporate strategy and budget. Risk mitigation ranks even higher. Their chief concern is relationship (as a proxy for risk management). This group typically does not want to be the first to buy a product, so they’re not going to be early adopters of new technology. Their perception of risk presents itself at multiple levels of the organization: professional risk (individual career-limiting choice), project risk (failed project that reflects badly on the department/business unit), all the way out to corporate risk (incorrect financial reporting exposing the company and its officers to criminal and civil litigation).
Their second consideration is price. Depending on whether the initial purchase is capitalized or not and how the operational expenses are allocated, price can be a real concern due to budget constraints. Buying decisions (both capex and opex) need to fit into the parent company’s fiscal year cycles. This group is very interested in features but product selection can often be mandated by the parent. When the product is not mandated, integration or submission to the parent solution of standardized reporting is absolutely required. These requirements limit or eliminate feature choice. For all of these reasons and more, buying is typically centralized, so sales motions between large enterprises look similar when selling to subsidiaries. Typical software product purchases for this group can be hybrid, configurable (large enterprises often use templated workflows with subsidiaries to ensure standardization of process) and again can often be point solutions. All of this requires strong corporate IT oversight to manage risk while ensuring they do not impede the operations of the subsidiary.
Priority 1 = Relationship (risk management)
Priority 2 = Price (budget-constrained)
Priority 3 = Features (best of breed – approved by Centralized IT)
Independents, Owner – Operators, Professionally Managed Companies and Subsidiary of Large Enterprises are my four segments. Large enterprises that treat SMBs as one identical group for sales purposes, often don’t get the results they want.
My advice in targeting SMB companies is to pinpoint which of these four segments they’re in, by asking two questions:
1) How are they managed?
2) How are they funded?
If you know that, you’re well on your way to knowing how to sell to them.
Written by Jory Lamb, CEO & Founder
As CEO of VistaVu Solutions, Jory has the overall responsibility of vision, strategy, product portfolio and corporate development. As a huge fan of the entrepreneurial spirit, he started the EO Calgary Accelerator program, mentored startups and delivered talks to hundreds of existing and upcoming entrepreneurs on managing growth.