I recently wrote about why the enterprise is a great market to target for a fast-growing tech company. But not everyone can target the enterprise. Your product might fit best with the Small and Medium-sized Business (SMB) market. So here are some critical lessons I have learned about how best to attack the SMB.
What is an SMB? Definitions vary, but generally accepted definitions are that SMBs have less than 100 employees and/or less than $100M in revenues.
The good news is there are a lot of SMBs and they are everywhere. There are currently over 5 million SMBs in the US alone. Collectively they represent an enormous market.
The bad news is there are a lot of SMBs and they are everywhere! Which makes targeting the ones suitable for your product a very significant challenge. You have to identify, develop and close SMBs very cost-effectively so you don’t go broke on the small deals they yield. And acquisition is just the beginning of the challenge of SMBs. As small companies, they have limited budgets and resources. They often lack the domain expertise to make your product successful. They are more exposed to business cycles and hit financial hardship more frequently. As a result, they churn more often than larger accounts. And to top it off, none of them consider themselves an “SMB” and want to be treated like a small company.
So how do you build a business on the SMB without going out of business? Here are the lessons I learned while CMO at RingCentral and Taleo, which both had significant SMB businesses. This post will focus on the acquisition of SMB accounts. Keeping them once acquired I’ll save for a later date.
I think a lot of people attack the SMB with a similar strategy to attacking larger markets: find interested prospects, nurture them into later stage opportunities, and pass them to sales to close. This doesn’t really work for the SMB.
The key with the SMB is you need much more velocity than the enterprise or mid-market because your deal sizes are much smaller. The entire marketing and sales funnel needs to be compressed and accelerated. Also keep in mind that while you are collecting contacts, nurturing them with wonderful content, guiding them down the funnel, some % of the 5 million SMBs are ready to buy your product right now. More focus should be put on finding and acquiring them than nurturing and development.
Beating the Law of Diminishing Returns
To reach the SMB effectively, you need to collect as much of the “low-hanging fruit” at the lowest possible cost. Low-hanging fruit are those prospects that need your product right now, or very soon and are just looking for a company to provide a solution. You need to find and acquire them as cost-effectively as possible at the time of their need (see Trigger Points below). But the low-hanging fruit is not unlimited and as you pour more resources into your most effective acquisition channels, you will see their conversion rates diminish as you spend more.
The faster the car goes, the lower its mileage.
The key is to know when an acquisition channel has become marginally less cost-effective than another channel (see Measure below), and to adjust spending accordingly so you don’t try to spend your way out of the law of diminishing returns.
No matter what B2B product you are selling, a phone system, a recruiting system, or cloud storage, an SMB company will typically hit a trigger point will that create a need for that product. At RingCentral, it was when a company opened a new office or their existing phone system broke. At Taleo it was when a company reached 500 employees, and email no longer served as a good applicant tracker. There is a point of growth or business circumstance that a company hits that triggers the demand for your product. Figure out what that is, identify companies with this characteristic, and message to the need created by this trigger.
The SMB market is so vast and so dispersed, that you’ll almost certainly need a multi-channel acquisition approach to reach all the pockets of low-hanging fruit effectively. Each channel will reach different segments of low hanging fruit. And these different channel segments will display not only different acquisition costs, but also different LTV profiles. Also there is a multi-channel multiplier effect as many prospects will require multiple touches from multiple channels before they engage and convert.
At RingCentral, we acquired prospects thru 15 different acquisition channels. One October, we noticed that all our acquisition rates across all channels went south by about 15% starting on October 1 and continued thru mid-October. We could not figure out why. Then we realized that the San Francisco Giants baseball season, and our SF Giants radio and TV ads, had ended on September 30, and our Golden State Warriors ads didn’t start until late-October. For 3 weeks, we were without any brand spending and awareness and the results were crystal clear. Those ads and brand campaigns were giving us lift across all channels. Stopping them for even one week caused a clear hit to our acquisition metrics. This also demonstrated the immediacy of the SMB market. Your opportunity to acquire low hanging fruit is now. And those companies might not be in that mode next week.
As seen above, when targeting the SMB, it helps tremendously if you have an established, well-known brand that can help lift acquisition across all channels. At Taleo, our enterprise product was the leader in the market and had a very well-known and highly regarded brand. We only decided to get into the SMB because so many SMBs had heard of Taleo and were coming to us to buy but could not afford the enterprise product. At RingCentral, we had to build the brand over time thru advertising and digital marketing. No matter how you get there, your brand is critical to help lift acquisition across such a large prospect base.
Measure, Measure, Measure
With a multi-channel approach, you need to measure everything and track acquisition and conversion metrics at all stages. Our most insightful metric was CAC/LTV (Customer Acquisition Cost/Lifetime Value), because in one metric it summarized the challenge of every GTM strategy – minimize acquisition cost and find the highest valued long-term customers. You’ll want to track this across all channels, geographies, product lines, and verticals, and ideally build a predictive model as we did at Taleo and RingCentral that can help to direct how to spend your marketing budget to get maximum revenue production.
As with any business, minimizing churn is critical to business growth. But it is more important with SMBs because not only is churn higher due to less company stability, but SMB accounts don’t have as much upsell potential as larger accounts. Churn will vary by customer segment and by acquisition channel. Measure your LTV for as many years as you have data so you can analyze which acquisitions yield the most revenue over time. You might find some of your lowest-cost acquisitions don’t stick around for the long term and show poor CAC/LTV.
Closely Manage Cost of Sales
To succeed in the SMB, you’ll need to very tightly control your cost of sales so you don’t spend too much time and money closing small deals that don’t cover the cost of acquiring them. This is most often done with different sales teams, customized to the customer segment they are attacking. RingCentral had 5 different sales teams based on company size, plus web sales and partner sales. Taleo had 3 different sales teams based on the size of the account. Selling to a 20 person company is very different than selling to a 250 person company. So the selling strategy and team compensation need to be tailored to match the sales cycle, close rate and deal size of each segment to develop them profitably.
Ultimately to succeed in the SMB, you need to build a GTM machine: a highly mechanized multi-channel marketing and multi-team sales process where each group knows their role and plays it well in coordination with the other teams. This allows you to optimize your GTM dollars by investing where the marginal efficiency of acquisition and lifetime value is the highest.
Finally, once your business has established itself in the SMB, you have the potential opportunity to leverage everything you have learned and the GTM machine you have built as a stepping stone into larger accounts, larger deals and lower churn. This will likely require enhancements in your products and services, and a new GTM strategy for that market, but bigger companies and bigger deals will lead to faster growth.
Now you know how to build a business on the SMB without going out of business!