A VC in Vacationland

I just got off a long conference call with two CEO’s from software companies in my portfolio.  They had independently sent me emails last week bemoaning the difficulty of cracking the SMB(small and medium business) marketplace.  Both have products well suited to SMB needs and both have been working diligently against rational marketing and sales strategies to penetrate the SMB space over the last year.  Their lament was the same: they have had some successes, but no groundswell of new clients.  They were both questioning their channel and sales strategies for reaching and closing SMB customers.

The SMB marketplace is, in a word, difficult, for many software companies.  Small budgets, few staff people, and minimal technology expertise among other factors make the SMB’s a tough sell for software and hardware.  SMB’s may be better candidates for structured services offerings than traditional technology product sales.  Offering a complete managed services solution with outcomes, such as sales leads, that a small business can immediately act upon may be preferable to trying to sell them a software package requiring training and execution time from overworked internal staff.

Many well known companies have been able to sell products and  services to a large number of SMB customers.  ADP is very successful in the payroll outsourcing space; Skype is doing well with its VoIP offerings; MasterCard and Visa provide customer credit security and payment services as examples.  These are all critical processes needed to run a small business and are not easily done without in the SMB space. Selling additional services and products beyond these critical functional areas is definitely more of a challenge.

There are four important factors to consider in developing a SMB marketing,sales and execution strategies for software products and related services:

1. Partners–unless you are 3M, Coca-Cola or some other huge conglomerate with a large sales force that regularly visits small businesses, you will need to find partners to help you go to market by industry.  Many software companies link up with local VARs and other resellers, using percent of sale contracts to incentivize these companies to sell their products.  Small business consultants are also an important channel, especially if implementation or ongoing services are a key part of the sale. Driving that partner channel with call centers or "dialing for dollars" staff is a good way to ensure partner loyalty by providing them with qualified SMB leads.
2. Software Design–software and maintenance/service packages are often designed with large businesses in mind.  Often, they have too many options and are too difficult to manage in the SMB environment.  Ideally, software and service packages should be designed for the SMB market directly.  If that is not possible, then piloting various service and software options with a number of SMB clients will help you understand what works best in their environment.  The biggest mistake many software companies make is to assume that their existing packages can translate easily into this market.
3. Pricing–an interesting strategy, and one followed by Skype, is to make in network VoIP call free and charge for out of network calling.  Fred Wilson of Union Square Ventures calls this a "Freemium" business model, whereby the basic service is free but many clients opt to pay for the premium service.  Pricing is a very difficult challenge in the SMB marketplace.  You may be better off charging on a usage or transaction basis(like MC/Visa) for your software, and bundling services in a consulting contract, instead of the traditional license fee/maintenance contract.
4. Software as a Service–Defining a TES (technology enabled service) model for your offering to the SMB space could be the most value creating option for a software provider.  Clients may be unable or unwilling to add staff to manage technology, but can be sold on the idea that you can provide a service that will give them the results they seek without a heavy investment on their part.  With ADP, the payroll checks show up each week, the owner gets full financial reporting, governments get their withholding, the W-2’s are issued on time, etc, etc.

In sum, the best approach is to build your SMB market applications from the ground up, working closely with pilot sites to get the feature/functionality/ease of use/pricing/etc. right from the start.  Absent that approach, dedicating a team to redefining existing software and services for the SMB market, again working with pilot sites, is much better than trying to jam inappropriate offerings into the hands of unwilling buyers.