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SMB / SME Have Become Obsolete Acronyms

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.

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Comments

  1. SME / SMB Have Become Obsolete Acronyms

    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 t…

  2. I agree with you. SMB is too broad a category and doesn’t address the finer segments that you’ve identified.

    I’ve begun using the VSB (Very Small Business) moniker when describing my new startup (HubSpot) which seeks to provide a SaaS solution for specific verticals in the VSB market-place.

  3. The term SME is not going to be obsolete in the foreseeable future, if just for government compliance reasons. Governments may be criticised for not helping SME’s enough, but they realise that SME’s are important. In the UK over 50% of the business employment derives from SME’s. Governments need definitions to determine tax breaks, audit requirements, employee regulations etc.

    The term is very broad in its meaning and as a sophisticated user you’ve drilled down to get more information. The common ones are size, sector and location, but obviously there are more. The important thing on helping a business is not the acronym, but actually understanding the needs of the business and for some of those businesses the SaaS approach is just perfect.

  4. Anonymous says:

    Hi Zoli

    I totally agree with you that the software needs of a very small operation are totally different to a medium-sized one. The other important categorisation is sector. For example, a medium sized distributor needs a very different system to a medium sized law firm.

  5. Zoli Erdos says:

    Hi Philip,

    I agree the term won’t become obsolete from a government regulatory point of view (the SBA has tight definitions here in the US, too) but I’ve made it clear I am talking “in terms of describing a market segment, especially in the software industry“.

    I also agree with you that it’s not the acronym that’s important, but the business context behind it. For all I care, very small businesses could be called VSB or XYZ:-)

    The point again, from a software industry point of view is that for many vendors and analysts this has been a process of “coming down” from the Fortune x market, and while they talk about SMB / SME solutions they still think their customer is the CIO or IT department at the “SMB” – well that may be so for the mid-market, but the really small businesses don’t even have a full-time IT guy whatsoever.

    So to very clearly restate the message: the (software) needs of a very small business are significantly different from a midsize organization, and lumping them together masks that difference.

  6. SaaS for Very Small Businesses – Show Me the Money

    Recently, in  SME / SMB Have Become Obsolete Acronyms I discussed how now, that business software and services have become affordably available to small businesses, the SMB term has become inadequate to describe this market, especially from the so…

  7. How about the business software needs of the shoe-string operations? Are these included in your opinion under the SME/SMB acronym? Most of these “glocal” startups run from the living rooms however do benefit from the recent SaaS/open source trend and exponentially growing smaller and smaller niches and long-tail demand.

  8. Zoli-
    I talk with about 20 small business owners every day.
    I will tell you, when you see those tv and magazine ads from the likes of IBM and SAP intended for the SMB market, there is definitely a disconnect.
    This leads one to believe that the traditional enterprise software company’s view of small business is not based on reality.

  9. Maybe rather than SME we need a number tag. Turnover is USD divided by number of staff. So a business turning over $25,000,000 with 40 staff would be a 625 business.

  10. Melbourne, that’s a nice easy answer, but it doesn’t deal with the complexity of some businesses. For example, a hamburger joint with 90 staff may be a lot easier to run and manage than an engineering firm with 10 staff notwithstanding the dollars per employee.

    Software companies need to target those companies with big upside for better reporting and automation.

  11. I agree with you. SMB is too broad a category and doesn't address the finer segments that you've identified. Graphic Atrs Resume is there in Sampleresumes.in which is nice. I like this resume

  12. I agree with you. SMB is too broad a category and doesn't address the finer segments that you've identified. Graphic Atrs Resume is there in Sampleresumes.in which is nice. I like this resume

  13. I agree with you. SMB is too broad a category and doesn't address the finer segments that you've identified. Graphic Atrs Resume is there in Sampleresumes.in which is nice. I like this resume

  14. That is a very good post! To the point exact to how I see it. I had the problems with this oxymoron while doing research on SMEs and am running into the same kind of difficulties while doing customer segmentation in Office123. How would you call a small business (of up to 50 people) in the US without running the risk of being misunderstood by the US counterparts? Microbusiness? Accroding to Wikipedia microbusiness is the same in Europe and the States – a company of under 10 employees.

Trackbacks

  1. [...] company had an affordable On-Demand integrated business management solution for the   VSB – very small businesses, the “S” in SMB / SME: typically companies with less then 25 employees, sometimes only 3-5, [...]

  2. [...] All-in-One SaaS provider 24SevenOffice, which caters for the VSB (Very Small Business) market also sees a hybrid model: automated web-sales for 1-5 employee [...]

  3. [...] All-in-One SaaS provider 24SevenOffice, which caters for the VSB (Very Small Business) market also sees a hybrid model: automated web-sales for 1-5 employee [...]

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