SMB- Redefined?

No one can spell my name right when they hear it. Every time I introduce myself I have to spell my first and last name. By no fault of my own, I live on an unspellable street, which does not help much either… After almost 14 years in the SMB space, I feel exactly the same every time I mention my background, talk to a journalist or an analyst. The first question I am asked is: how do you define SMB?

If you try Wikipedia, the confusion will just grow: not only does every company have a different definition, different companies will have their own ideas as well. SAP defines SMB as companies with $1B worth of revenue and below. Gartner thinks that it is actually companies with revenue of $800M and below. With the dollar shrinking, they may well be right… Nevertheless, the important question is not how one defines SMB but why all the big companies treat it as one market?

Almost every company I meet has a diagram that looks like this: SMB

The definition varies from company to company but the principle is the same: over 55M companies are organized under one category, and in most of the cases one organization is dealing with this huge market segment. The problem is that there is absolutely nothing in common between a company with 12 employees and a company with 300 employees, so the result is an unhappy medium. As a matter of fact, there is much more in common between the 300 employees company (categorized as SMB) and a large enterprise with 1,000 employees. Treating the SMB market as one market happens mainly because the people who define the categories are coming with an enterprise mindset. After all, when you fly 40,000 feet high in the enterprise skies, small buildings and medium buildings look the same…

Based on my experience, I would like to distinguish between several categories of SMB companies. As always, it varies by maturity, industry and growth orientation, but it can serve as a general guideline.

  • Singles – Self-employed consultants, e-bay traders, physical therapists and consultants. They usually employ zero additional employees and act like consumers (what’s wrong with Gmail for my e-mail??). There are millions of them and they churn very fast.
  • Family – Although not all small businesses are established by family members, the smallest businesses, say up to 10 employees, act like a family. Usually there is a paternal character: the founder/owner. In some cases there are two partners (or “real” husband and wife) that make up the leadership team. They act like a family and think like a family on employee-related decisions and on spending. There are no reporting lines; everyone works for the “parents” and they usually divide the work between them based on skills and passion, just like in a regular family. What does it mean? In most cases, everything will be personal with these businesses. Selling them will be just like selling to a consumer, and a decision on spending, say, $150 a month on a service will be made in a similar way to a decision about renewing cable subscription or going on a vacation (and will come from the same bucket of money…).
  • The Italian family – As the business grows, the family grows. It is now bigger and has new “cousins” involved. In some cases the “kids” will take ownership on a topic (say sales) but will not have a full managerial authority. The “parents” still rule, but they may get more help now. The family structure usually lasts until a company is about 20-25 employees strong. This size calls for the beginning of an organization. The Italian family is very much like the regular family. It is still a closed and emotional club with 1-2 at the top and the rest following. Try to talk with them about efficiency, increasing productivity and the like, and you will find that the way to the door is shorter than you thought. Talk with them about making more money or about the products/services they have (which are usually the real passion of the owner) and you will stay there forever.
  • The pre-organized business - with 25 employees and a lot to worry about, the typical business owner will start thinking of organizing the mess. While you are not likely to see an org chart, some of the unofficial lieutenants will get an official responsibility and some people to manage. The “parent” will still be very involved in sales and the other mechanics of the business, but some of the work will be done by the new established managers (by the way, it is typical to see that only some of the areas get to have managers and the others still managed by the owner). In many cases, these managers never managed before and will look for ways to make an impact. Good time to sell a CRM solution to the new sales manager or offer other services that will help eliminating some of the day-to-day mundane work. This stage can vary; in some companies it ends when the company reaches the 40 employee mark, in some it takes 70 employees to graduate, but this stage is typically the stage of gut decisions around growing the business. Advertising is discussed more often, systems are introduced and new types of needs arise, such as basic HR, a better telephony system and business identity. In many ways, this is the small business adolescence period.
  • The small company - If growth continues and our family is now larger (say 70 employees), the owner/CEO is likely to think hard on structuring the company. Businesses at this size will start having departments with clear management and accountability. This is the time a first org chart is drawn and “bigger” decisions are made: move to a new office or not? buy an ERP product? Get a managerial consultant to help the novice managers? Hiring a CFO? Outsourcing HR? With more to lose or to gain, these businesses will think more of compliance (not SOX but rather employment, county regulations, etc). Companies can stay in this stage for a long time, and as they grow bigger they just get more organized, and add functions, like head of HR, or CFO. These companies will actually be interested in efficiency, management tools and a more business consulting. Graduating from this stage will usually happen when they go national or global, or when they plan to go public.
  • The medium company – This company is not going to be much different from a large enterprise. It is time to establish written processes, better financial management, SOX compliance, better controllers etc. The medium company is almost always a large company wannabe, so treating it like a large enterprise actually helps, since the CEOs tend to trust companies that deal with large enterprises more than companies that became famous in the SMB space. How big are the medium companies? There is no line, but I tend to think that being a 150 employee and above company puts you there. The few things that distinguish medium companies from the larger ones are the number of them, the ability to spend and how global/national they are. The rest are just variances of the same pattern.

The point is: there are actually 5 types of SMB companies -and this is without taking into consideration verticals and business types: sustainable or growth oriented. If you agree with the distinction made above, you would also agree that treating SMB as one integrated space may not be the right thing to do. My advice is simple:

  1. Create your modification of this definition based on verticals, industries and geography.
  2. Decide if you want to sell to all the SMB categories. For many companies it would be wise to exclude some and focus on the ones more suitable for their products and processes.
  3. Define different go-to-market strategies for the family-oriented businesses, the small companies and the medium companies. Consider establishing different teams for each category with different goals and KPIs.
  4. If you go down market, you will need volume oriented processes. Don’t try to “cheat down” and tweak mid-market processes to work for tiny companies.
  5. Don’t ask your mid-market people to sell to small companies or your large enterprise guys to sell to mid companies. It is good on paper but can’t work in real life due to different motivation and compensation.
  6. One size fits all works only with baseball caps.

Gadi Shamia

See also: The subsidiary of Large Enterprise

About these ads
SMB- Redefined?

13 thoughts on “SMB- Redefined?

  1. Stefan Schaffer says:

    Gadi,

    happy to write the first comment to your BLOG.

    I really enjoyed your view on how to categorize the S part of SMB (although one can argue if the Italien Family deserves an own catagory).

    I however feel, that it might be worthwhile to try a similar exercise with the M section. I am not sure if this segment is as homogeniously similar to the large enterprise category as one may think.

    From my experience (much less than your’s), one can find quite a bit of differences there:
    – Many companies seem to be laser-focused on different core competency or on the topics, the current CEO has a focus on (some are sales-driven, some R&D driven and some with a strong tendency towards services)
    – Some M companies are extremely linked into some large company’s eco-systems which drives much of their thinking
    – Some seek to grow independently and some are looking to become acquired at some point
    – Some are family-owned, some venture capital funded
    – …

    I am lacking the in-depth insights to propose a meaningful categorization myself, but maybe I have stipulated some ideas with you or with other people.

    Take care
    Stefan

  2. Philip Lay says:

    Gadi,

    As Stefan Schaffer says, you have taken an intersting stab at breaking down the S companies into five separate categories. Apart from needing a companion definition of M companies, I think it’s important to acknowledge another group of organizations within the bastard “SMB” definition: These are the divisions, subsidiaries, regional offices, distribution centers, and departments of larger organizations that often think and act like “SMB”s with respect to their IT requirements and even their purchase decisions and implementation needs.

    Congratulations on your new blog!

    Best regards,

    Philip

  3. Very interesting post, Gadi. I’m pleased to read that others are also attempting to better define the SMB market. It’s a much needed exercise…but I hope we’ll find common ground.

    I do disagree, in part, with one of your statements. You wrote “The problem is that there is absolutely nothing in common between a company with 12 employees and a company with 300 employees.”

    Perhaps if we restrict ourselves to a discussion about buying habits and the scale of IT needs, that statement would be correct. However, commonalities often transcend buying habits and scale. HEre are two examples from one of my recent reports about small office data protection – attorneys and healthcare professionals:

    I wrote, “In 2002, The Census Bureau counted over 488,000 ambulatory healthcare service establishments in the US, employing nearly 5 million people. The 50 largest firms were spread across an incredible 10640 locations employing little more than 400,000 people. The American Bar Association counted more than 1.1 million attorneys in 2006 employed by fewer than 50,000 firms. And, according to American Lawyer Media, nearly 90% of those firms employed fewer than ten attorneys. Only about 1,000 law firms consist of 40 attorneys or more.”

    Clearly there is an enormous number of smaller firms in both verticals, and within each vertical – and this is especially true for heavily regulated industries – companies share a bond of certain obligations to their customers, communities and governments. A 10 attorney law firm and a 12 physician healthcare facility should [and oftentimes must] adhere to the same ethics, policies and guidelines as law firms and hospitals 20x their size. The difference lies in how they do so.

    Scale aside, many enterprise and SMB products and services share the same underlying industry-specific requirements.

    In any case, I found your segmentation interesting. It is definitely food for thought. Thank you for sharing.

  4. Brian Williams says:

    A very nice breakdown. Your analysis of the family and how they make decisions is great insight. This insight can definitely help our way of thinking when pitching our services and solutions to prospective clients.

    Thank you,
    Brian Williams

  5. Gadi,

    This is the best dissection of the SMB market I’ve ever seen and my work involves working with CEOs of SMB companies (my definition is <$100mm revenue) stop throwing money down a marketing black hole and generate new business fast. But you’ve made me rethink – and perhaps resegment – my own efforts in this arena!!

    You are 1000% right about the Fortune 500 mindset of lumping 55 million SMB’s together in one segment – that’s nuts.

    AND – you’re totally right again about SMB vs. the various levels of micro-business. The soloists, families, Italian families, and so on. Huge differences in mindset, buying habits, and even the goals, wants, needs, and emotional triggers of the decision-makers.

    Thank you for this terrific piece.

    — David

  6. David,

    The hard work of writing a blog worth it when you get comments like yours! thanks.
    I wish that more people will look at the market with a magnifying glass. We tend to take any market and generalize it because it works better on slides but not in the real world.

    Gadi

  7. Gadi – thank you for this. A really useful segmentation especially for the smaller end of the SMBs. I’m just working on some segmentation strategies for this market and on the basis that in the 10 – 50 employee bracket, business decisions will be made to a large extent by the owner and this is heavily influenced by their personality. We’re looking at cross referencing a B2C segmentation at a contact level (i.e. the business owner and personality type) with the actual business segmented by organisation size to determine what kind of messaging we will use to the organisation. Any thoughts on that? I’m also looking at 100 – 250 employees and I have to be honest, I’m struggling to find any meaningful segmentation at this level other than perhaps by vertical sector. Do have any thoughts on that, other than they operate much more like larger organisations? Thanks for your insight. V useful.

  8. Prajith Nambiar says:

    Hey Gadi,

    Stupendously written break down of the SMB categorization. As referred by you this has always been a very frequent query that comes up, viz, the classification of SMB’s, SME’s & Large Enterprise…This article should really help. Different people have different answers. Very frequently found answer is the classification on the basis of:

    1. Number of employees in the organization
    2. Quantity of data being handled by the organization
    3. Strength of IT infrastructure available in an Organization
    4. Geographical boundaries of an organization
    5. Annual turnover.

    Although your articles covered most of the points stated above, it did so in a very refreshing manner. Different from the usual monotonic tone.

    Carry on the good work Gadi. Looking forward to reading more articles from you.

    Prajith Nambiar

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s