Tuesday, May 15, 2007

No such thing as a mid-market company

Josh Greenbaum thinks that enterprise software vendors are mistaken when they try to segment buyers according to size. According to Josh, the requirements of software buyers do not vary significantly according to the size of the company. Rather, they are driven primarily according to the organization's view of technology.
Here's my simple market taxonomy, which I believe pretty much spells out the death of the mythical mid-market company.

Market segment #1 consists of buyers for whom IT is a utility, much like electricity and water, that is a basic commodity but has little if any role in defining strategic advantage. IT keeps the lights on, but it is really secondary to the task at hand.

Market segment #2 consists of buyers for whom IT is a major strategic differentiator, one of the things that drives competitiveness and supports innovation. These buyers also use IT to keep the lights on, but the real reason they buy technology is to deploy it at the cutting edges of their industry.
I think Josh is on to something. Nearly all enterprise software vendors segment the market according to size. The reason: it's easy. Deciding whether a lead should be assigned to the direct sales force or to a reseller is simple--just see how large the organization is, either by annual sales or number of employees.

Likewise, business planning is straightforward. How large is the addressable market in a certain territory? Simply count the number of firms in each size category and SIC code. Furthermore, because most vendors price software according to the size of the company (i.e. the number of employees, or number of users), forecasting average selling price in each market segment is a simple calculation.

Carrying the scheme further, vendors often target their product offerings according to the size of the buyer. For large companies, they may sell a full-featured product (e.g. mySAP, or Oracle E-Business Suite). For the so-called mid-market, they may sell a completely different product (e.g. Oracle's J.D. Edwards). Or, they may pre-configure the big-company product into one or more mid-market versions that supposedly represent typical mid-market requirements (both Oracle and SAP utilize this approach as well). The problem is that, invariably, the buyer always seems to need one or two features that are not in mid-market product or the pre-configured template.

As with most sales and marketing issues, the problem is that vendors do not look at the market from the buyer's perspective. Companies do not generally go looking for a "mid-market solution." When they say they do, what they really mean is that they want the mid-market price and ease-of-use. But their primary driver is to find a product that meets their requirements. This leads to all sorts of interesting stories, such as having to convince the vendor that a so-called mid-market company is actually a good fit for the vendor's big company product, or vice-versa. I always find it amusing when I have to sell a prospect to the vendor.

Fortunately, most vendors have a few grey-haired sales types that "get it," in spite of what the program dictates. Finding those individuals is the key.

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Making money in software with a niche-industry strategy
How not to buy software
The case against case studies

1 comment:

Karthik Mani said...

Frank, Josh and you are making a very good point. Irrespective of the size, companies that think of utilizing business process as a strategic differentiation have the same level of complexity in requirements. I agree that finding the few grey-haired sales types that "get it" individuals is a key. Adopting the technology at the right time is another key. Let me explain.

I am not an expert in transaction systems. My views are colored by "planning /optimization" enterprise software background. Implementing a system for a small company takes as much effort and features as for a large company. So the implementation costs end up being similar. Given the small license fees for most software these days as percentage of total cost of ownership, implementation costs dominate.

The small companies get smaller return than larger companies because of their size. So, usually, larger companies tend to be early adopters of technology even when implementation costs are high because of learning curve and product maturity issues – they can afford it. Smaller companies should adopt technology once the software has been implemented in 5 or so customers. Implementation costs fall exponentially from the first customer to the 5th customer. Waiting long after that does not have much in terms of implementation cost reduction; you lose in terms of strategic differentiation.

Karthik Mani