Are small businesses doomed to fail, or can SaaS help?

According to the Bureau of Labor Statistics in the US, only 44% of small businesses successfully make it through four years of operation. One reason is that because of their size, small businesses cannot master the skills that larger organizations have (such as marketing, sales, service and technology). So, it should not be a surprise that they have a hard time competing in the marketplace.

One of the areas that has been a weak spot for small businesses is the use of technology in general and software in particular.

From a software vendor standpoint, small businesses were traditionally overlooked as a target market. In fact, in the 1990’s, common wisdom was that successful software vendors should focus on large enterprises, where the money resides, and apply the direct sales model, with a $100K+ price tag. The wisdom at the time was that smaller price tags did not justify a direct sales force, and required indirect selling. Selling through resellers, however, was and still is hard to crack. It’s hard to get resellers to commit to sell a product before it gets traction. And even later, it’s hard to educate resellers to sell a product proficiently.

From a small business point of view, buying software is—simply put–not easy. How can a small business be expected to have the skills to evaluate new software? How can they be expected to master how to operate the software? How can they be expected to integrate it with other software? And, when it comes to on-premise software, how can they afford to deploy and manage the software?

But then SaaS came along.

Clearly, SaaS reduces the bar in terms of the operational cost of software. With SaaS, businesses no longer need to deploy and manage the software, which removes an important barrier from the sales cycle.

However, other barriers to selling to small businesses still exist. Small business lack the knowledge to evaluate software. So, it’s hard to convince them to buy “the right” software. And once they do – they can still be swayed to switch to a different solution due to “the wrong” reasons. Even in the best case, it’s hard to get them to use the software optimally due to limited expertise. What’s worse, however, is that vendors still need to incur a sales cost and the whole financial upside is limited for each small business.

It’s not surprising that up until recently, most SaaS companies still aimed at enterprises. Salesforce.com, the poster child of SaaS (with the somewhat amusing slogan End of Software), focused on large businesses (and for many years presented Cisco as its flagship account). Eloqua, ExactTarget, Workday, Marketo, Rally Software, Jive and others also sell mostly to large businesses. The SaaS company I co-founded, Webcollage, also sold to large brands (such as Samsung, P&G and Hasbro), albeit—sadly enough for us—at a much smaller scale. Selling to large companies is not easy, but has a tangible upside for each account.

In the recent few years, however, a number of SaaS vendors that targeted the SMB market have demonstrated success. A few examples that come to mind: ConstantContact and MailChimp (email marketing), SurveyMonkey (online surveys), Wix (website creation), Google Apps for Work (office productivity), ZenDesk (customer support), HubSpot (marketing and sales automation). There’s actually a recent nice write-up (by Tomasz Tunguz at Redpoint) specifically about HubSpot following its IPO.

What has changed? SaaS has been a good match for smaller businesses from the get-go due to the reduction of operational barriers. But, it took a while until vendors figured out how to approach the SMB market effectively. Some elements of the approach include:

  • An easy-to-use product: forget feature bloat, the product needs to be simple to use from day one
  • Simple onboarding and first-time user experience: users will not take hours to try the product out or talk with sales representatives
  • Trial periods and freemiums: getting customers hooked on a free service, and then upselling them a paid service
  • Selling process: a combination of online marketing, low-tech sales people and customer success, to optimize the funnel and conversion.
  • Marketing automation: automating many of the touch points with customers pre- and post-sale, to provide scale

A couple of related write-ups can be found here and here.

Interestingly enough, the above players provide a horizontal solution (which applies to multiple verticals). But, there’s also a growing number of solutions for specific verticals: anywhere from the well-known Shopify (e-commerce) to smaller niche players (one that was recently mentioned in a conversation is MindBody, which provides solutions for managing fitness centers).

With small businesses accounting for approximately half of the country’s business and workforce (for most countries), it remains to be seen whether the new wave of SaaS solutions can help small businesses leverage technology more effectively in the competitive marketplace—while at the same time this being a healthy business for the vendors. If it does, it may help shape up a world where small and medium business take a bigger role in.

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