SMB / SME describes Small – Midsize Businesses (Enterprises), but in terms of describing a market segment, especially in the software industry it has become obsolete. Why?

It used to collectively refer to companies too small to be attractive for the major Enterprise Software providers – and of course the same held true vice versa: it described a group of businesses that could not afford “enterprise software”. Well, that’s changed with Oracle, SAP now catering for the lower- mid-market, and a growing number of innovative new software solutions affordable even by the really small businesses. Hence the problem with the SMB / SME acronyms: they were sufficient to describe the “crowd to be ignored”, now that the software industry can actually address the needs of this segment, it’s too heterogeneous to be lumped together. To demonstrate the point, here are two articles talking about sofware in the SMB market:

SaaS Players Jostle For Position (internetnews.com) uses the term SMB, cites a VC and software vendor, but clearly the focus is on “small- and medium-sized companies of several hundred employees and 20 or more sales reps”

In Gartner, SAP and small business – an oxymoron? Dennis points us to Small Business Vision – a Gartner Event. As he says: “SAP also has a definition of SMB which starts at revs of $250 million. (last time I looked) Which kind of says it.”

There is very little a $200M business and a 10-person startup have in common – their IT needs will definitely be different. Most analyst who talk about SMB really mean midsize businesses. That’s an important market, but let’s not forget the huge untapped opportunity the “long tail” presents; i.e. the millions of very small businesses that can now directly be reached, sold to, serviced inexpensively over the Net – classic SaaS style. Essentially what we are seeing is that the SMB / SME market really isn’t one segment at all, but at least two … perhaps three:

• SAP, Oracle may consider a $100-200M million business “small”, but it really is midsized, the “M” in SME, with a few hundred employees and a dedicated IT department, that will likely need help with software implementation, but will cope with the ongoing maintenance themselves. SaaS is a wise choice for these businesses, but certainly not the only one.
• One could define the “S” part, i.e. small businesses in terms of revenue or headcount, but from a software point of view a more important criteria is that they typically do not have permanent IT staff on payroll. This by definition makes any software products that are implemented and ran at the customer’s premises a poor choice – a potential maintenance nightmare. There is simply no better option for this group than SaaS – Software as a Service.
• The third category in my mind is the very-very small business, possibly with 1-5 employees, who are likely all do-it-all types, focus on their core product / service, and are likely to struggle not only with IT, but some of the standard processes of running a business. This category needs more help than just technology, and vendors like WinWeb are experimenting with a unique combination of hosted software as well as “Live” services, i.e. expert advisors in various aspects of business. (Update: see Stefan’s new post on Live Services)

I’m hearing a new term more and more: VSB – for Very Small Business, describing either the third group above, or a combination of the second and third.

(Key ideas in this post were first published at The Small Business Blog where I am a guest blogger)

Update: 3 days after this post, Wikipedia now has an entry for VSB.

Update (8/14/2006): Vinnie‘s guest blogger, Jyoti Banerjee approaches the issue from the opposite direction, the “M” in SME / SMB, but comes to the same conclusion, i.e. they should not be lumped together with small- and micro-businesses.

Update (10/23/07): Further SMB segmentation by Gadi Shamia.

Tags: smb, sme, small business, SaaS, On-Demand, VSB, Vey Small Business, SAP, Oracle, WinWeb, zoliblog