The Down-Market Fallacy: Why Big Vendors Fail in Mid-Market Capture Attempts

Going down market and getting down market technology customers are two very different things. Technology vendors may do well to heed the cautions in this post before moving into a new sales space.

(My colleague Dr. Katherine Jones penned this - I hope you enjoy it).

Here is something research analysts have heard a thousand times: “We have a new ERP sales initiative: selling to the middle market.” ERP solution providers and companies that have provided other business applications (such as talent management) to large enterprises are repeatedly flummoxed by the myth of the mid-market – making assumptions about those companies with revenues between approximately $50 million up to $1 billion that are patently in error. What goes wrong? Let’s look at some of those assumptions.

1. There is one giant segment called the mid-market. There isn’t. Small and mid-sized companies (SMBs) come in all the shapes and colors as large companies, and far more closely identify to other businesses in their verticals than to other same-sized companies. So there is no “middle-market;” there is instead many vertical businesses that happen to be smaller than the enterprises that vendors are used to targeting.

2. Mid-market companies will be impressed with our brand, name recognition, and our experience with big companies. They won’t. Penetration into the Global 2000 is not particularly impressive to a SMB customer – it is more likely to reinforce the belief that your company fails to understand the business requirements of smaller enterprises.

3. Mid-market companies buy just like big ones. They don’t. They are more risk adverse, likely to spend less, require tangible ROI in no more than 12 months, and require references of the same size and in the same verticals as themselves. They are more likely to buy technology to fix an existing problem then to move them into the future – unless the company is launching a new initiative for which it has no technology.

4. Mid-market companies face the same IT challenges as large companies, and address them much the same way. Same challenges, yes—same resources to address them – no. For example, if your solution requires a data base administrator in addition to trained IT management staff, make sure your prospect actually has one. Otherwise you can plan on submitting a proposal that adds up to $150,000 a year for a skilled Oracle or DB2 administrator to the cost of the contract.

5. If we can sell big, we can sell mid-sized. Bounding into mid-market sales without realizing the ROI model can lead to disaster. Consider:

a. Cost of sales can exceed that for enterprise sales in that the time invested may not be recouped in the revenue gleaned. b. The sales team that can address the large enterprise may not be successful in “wow-ing” the mid-market CEO or CTO. c. We can use the same incentive compensation schemes for comping our mid-market sales team as we do for the enterprise sales. d. The most common competitor—and often the winner—in an SMB sale is the status quo – doing nothing. e. The recurring support contract will retain the SMB as our customer. Nope. This prospect is less likely to get the support you may deem adequate initially, dump support after the solution reaches steady state, and show no interest in upgrades at all. f. The concept of “local” may matter more to a mid-sized company. Doug Burgham, then CEO of Great Plains, once defined the mid-market as “Any company who will buy from a VAR.” Why? Local contacts, local support, and small enough to understand the SMBs business problems.

Many post-recession SMBs are in need of technology upgrades, having postponed acquisitions for several years. From discussions with many of these companies, we see their buying outlook remains “how do I cut costs” rather than “how do I increase revenue.” Vendors wanting to increase market footprint by going down-market have to articulate solutions that very specifically address this all-important point. This is where the SaaS (software as a service) solution as opposed to on-premise makes sense and makes the sale easier. When the solution proposed can avoid new hardware costs, prolonged implementations, and escalating long-term service contracts, the chance for success is far greater.

We’ve been briefed by many companies recently which have articulated or reaffirmed their dedication to mid-market sales. Recently, Kenexa, for one, seeks to add a focus on the SMB for its talent management solutions which have been very successful in the enterprise arena. Like some solution providers, the company has created different editions of its solutions that will specifically address the SMB buying segment. Generally, we see a fair amount of thought that goes into these solutions and in the SaaS space. We are seeing vendors price, support and even limit functionality for mid-market and small business customers. And, those adjustments are often on the mark with these changes. However, some of the vendors we see make us wonder whether if they will remember the success points listed above.