The mid-market briar patch

During the summer, one of the Capital Factory companies developed a plan to sell into the “mid-sized” corporate market. Uh oh.

The startup graveyards are littered with companies who tried to target this seemingly alluring market segment — customers small enough to be intelligent and nimble, young enough to embrace new technology, yet big enough to spend real money to alleviate real pain.

It sounds like it’s best of both worlds. But the reality is it’s the worst of both worlds.

They’re not “small enough to be nimble,” because at fifty employees they’ve already established much of the lumbering process and bureaucracy of companies a hundred times their size. Shackled by budgets and internal politics, technology changes require expensive coordination and retraining, and fear of change trumps potential rewards of improvement.

All this makes for an arduous sales process just like with big companies. But although they have the process and controls of a large company, they don’t have the budgets to match; there’s no large reward for successfully navigating the painful, Herculean sales adventure.

Worst of both worlds.

Why is it like this? Maybe they’re stingy because they’re still being run by a parsimonious small-business founder (like me!) who is still straightening used staples to save pennies. Maybe it’s because with a few dozen people, the segmentation of teams, departments, roles, and behavior is inevitable. Whether because of physical limitations of communication or human tendency towards tribal behavior, we fall into semi-autonomous isolation coupled with formal processes to ensure command-and-control, and a bureaucracy is born, self-generating and largely inescapable.

Whatever the reason, it’s a tar-pit.

Then there’s the numbers game. There are 220,000 businesses in America having 50-500 employees, and only 18,000 businesses with more than 500. That’s often the argument for going after those mid-sized businesses — look how many there are!

But the average employee count of the mid-sized is 119 and of the large is 3,100, so if your goal is to sell a copy of your software to everyone inside a company, you have to sell 30 mid-sized for every large. Or looking at it another way, the total number of employees of mid-sized companies is 26m, whereas large is 60m.

And since the sales effort isn’t much different between 75 seats or 750, this is a lot more work for the revenue.

Even setting aside the internal machinery, “mid-sized companies” isn’t really a market segment anyway.

“Mid-sized companies” have less in common than you’d think; it’s much more important to know what industry they’re in. A 100-person technology startup has a certain makeup of employees — ratios of developers, QA, tech support, sales staff, HR, etc — whereas a 100-person plastics manufacturing company has a very different make-up, for example having no software developers, probably not tech-savvy, and IT is run by a guy who is a Windows “power user,” runs Exchange, hasn’t heard of Google Apps, and doesn’t know how to open a port in the firewall “my Cisco guy” installed.

So for example if you’re selling server monitoring software, everything about how to sell into these two companies is different: How you find them, what pain you’re solving for them, what that user wants to see in the interface, etc.. The fact that both are monitoring 100 computers is only vaguely “the same;” there’s more differences than similarities.

The most common argument I hear targeting the middle is:

“Small businesses have no money, and the large companies already use Entrenched Competitors X and Y, so it’s in the middle that there’s opportunity.”

But there isn’t necessarily an opportunity. Maybe your competitors have figured out that it’s not cost-effective to sell to the middle.

WP Engine is a perfect example of this. My initial idea was to target the “mid-market” of the WordPress ecosystem — bloggers and websites big enough that cheap hosting was no longer delivering the speed, scale, and support they required, but not big enough that they could afford full-time WordPress experts or the $2500/mo (and up) cost of Automattic’s excellent but expensive “WordPress VIP” program.

There are some drawbacks here to be sure. People with $50/mo blogs have many of the same problems as people with $2000/mo blogs but pay us 40x less, which might imply we should focus on the high-end blogger. But there’s lots of $50/mo bloggers who never call and never have a problem where the profit margin is great (even if the absolute dollar profit is less), whereas a $2000/mo blogger is constantly running into new speed and scalability challenges since even small changes to their configuration is magnified by 10,000,000 hits a month, vaporizing that so-called profit with expensive expert human time.

In other words, exactly the problems of “selling the middle” — with small-blogger budget meets big-blogger problems.

If we just chose one or the other, we could optimize the rest of the business around it — hiring, automation, marketing, sales — and maybe we should. (Actually we have a theory that there’s another way for us to solve this problem, but that will have to remain under wraps for now. I know, I know, I just said hiding your business plan is silly, but although I’ve shared our “secret” plan with dozens of people in person, it’s a little different publishing it in front of 50,000 RSS subscribers… at least, not yet.)

So my immediate reaction to anyone “selling to middle” is the same: Yuck. If you’re going to do it anyway, I hope you have some nice, extenuating circumstances that truly makes you the exception to the rule.

Keep it coming: What’s your experience selling to a middle market? Would you do it again? Tips for doing it better? Let’s continue in the comments.

 

  • http://twitter.com/markturansky Mark Turansky

    Couple this with your last article about few/many customers at a high/low price point and I think you’ve drawn a logical conclusion.

  • CliffElam

    I used to work for a mid-market SAP implementation firm.  Which you might think was a sure recipe for disaster.  They were stupid profitable, though, and I learned a lot….

    There are SMB firms that are nimble and do have money and do recognize their problems.  The trick is to find them and work only on selling to them.  They are a TON easier to sell than a large enterprise – it’s much easier to get to the CEO, for example.

    -XC

  • http://www.ordoro.com/ Jagath

    I recently read Mark Suster’s take on this problem. http://www.bothsidesofthetable.com/2009/09/16/most-startups-should-be-deer-hunters/

    In your case, looks like the smaller customers are cost effective to manage if they  “never call and never have a problem”. What I’ve seen with others facing the similar dilemma is that the smaller customers take up a lot of the support time. I think it boils down to the unit economics of each segment.

    Great article. Thanks for sharing the thoughts.

    • http://matthewritter.net Matt Ritter

      I like his general idea, but was frustrated with his begging, then dodging, of the definition of ‘deer’.   In almost any decision there are extremes that should be avoided, but knowing the how to find the middle is harder than just knowing it exists

  • PaulSutter

    Is salesforce.com successful in this segment?

    • http://blog.asmartbear.com Jason Cohen

      At this point in time, SF is successful in every segment.  But if you mean where did they start out being profitable, it was in the enterprise-level.

  • jasonstoddard

    Please oh please keep churning out this fallacy. It keeps those younger, smarter and more tenacious entrepreneurs at bay just that much longer.

  • Saar Yoskovitz

    How do you couple this with the “innovator’s dilemma”, and the “compete against non-consumptiom” principle?

    • http://blog.asmartbear.com Jason Cohen

      That’s hitting the low end of the market, which is of course compatible with this idea.

      Also the challenge of an incumbent to disrupt themselves is very different from a brand new startup.  A large incumbent can do many things, including hit the middle market!  I just don’t think it’s usually the best target for a new startup.

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  • Ryan Wheeler

    So …. are you saying you’ve mucked up with WP Engine?

    • http://blog.asmartbear.com Jason Cohen

      Some do say that!  It’s an argument that should be made, because we need to be careful to avoid traps like customers who pay $29/mo and also want to talk on the phone every day.

      At the same time, we’ve unlocked massive growth here, so it feels right.

      Also we’re NOT in general selling to the SMBs described above who have “big company” needs while not providing that amount of revenue — the folks who use us are almost never 120-person companies with a website, and even then it’s such a small amount of money that the webmaster can make the decision without invoking permission.

      • http://giffconstable.com giffc

        Glad to see the “unlocked massive growth here” line :-)

        • http://blog.asmartbear.com Jason Cohen

          It’s almost overwhelming.  “Good problems to have” and all that, but not when there’s an angry customer on the phone!

  • Victor Chin

    I totally agree with the opinions here that SMB may not be the perfect starting ground for a startup; mainly because you’re precisely as Jason puts it, ‘caught in the middle’.

    I have personal experience trying to sell CRM into mid-market customers and I can tell you that the sales cycle and amount of time or effort required for the implementation is not very different compared to the Enterprise market. 

    Fortunately we had enough funding and starting from the beginning of last year, we switched our focus to the Enterprise market and our profits got back on track. It just made more sense for us to focus on closing USD100K deals compared to closing 10 deals which would then only amount to 1 enterprise deal.

    I mean just imagine, even if we close 10 deals on the SMB market, we would not have the manpower to complete all 10 implementations.

    Perhaps our business was a little more different since we were mainly charging on services but hey that’s the experience I have to offer on my end after deciding not to continue with the CRM product as we were not making enough; compared to the new solution we have just adopted early this year.

    If you guys wanna read more about it, it’s at the following link on my blog

    http://bit.ly/KMX8kh

  • sientelo

    If only I’d read this article a few years ago, I wouldn’t have spent 10 months of 2010 banging my head against a wall and literally cry tears of frustration. Splendid stuff Jason!

  • http://twitter.com/kevinecohen Kevin Cohen

    Great thought piece. This is exactly why the large enterprise IT companies push the smaller  deals  to the channels and business partners. Cost of sale is too high to run the entire sales cycle internally.  Although I still see too many sales reps who sell into this market  who don’t understand the fundamental concept that you are are articulating.

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