SMB Buyers Are Getting More Savvy

By Geoffrey James

With an increasing number of software firms viewing the small- to mid-size business (SMB) market as strategic, it is becoming more difficult to maintain the margin once customary with SMB sales. One solution? Increase your margin by targeting applications and services that SMBs consider valuable.

In the past SMB buyers tended to buy solutions that were priced according to the perceived value those solutions offered. Software vendors added to their margins by using pricing practices that essentially hid the actual cost of the software licenses and ongoing maintenance. For example, it was not uncommon for maintenance costs to be calculated on the list price of the software license, rather than the discounted price actually charged the SMB. These arrangements effectively increased the margin of the average software sale.

As the SMB market has become more strategic, however, SMB buyers have become increasingly sophisticated when negotiating contracts. According to the Meta Group, a Stamford, Connecticut-based market research firm, SMB buyers are beginning to emulate their large-enterprise counterparts and demanding the inclusion of future releases and maintenance contract deliverables, such as troubleshooting, help desk, patch administration, in their software licensing agreements. The result is a decrease in the overall margin on the average sale.

The most effective way to overcome the gradual erosion of margin is to make the average sale bigger by selling additional software and services to the customer from the outset. This approach is likely to work, however, only if the SMB buyer perceives that the add-on purchase has a powerful value proposition. A recent study of 1,000 North American IT decision-makers, conducted by the Cambridge, Massachusetts-based analyst firm, Forrester Research, Inc., suggests that the following application and services areas are those most likely to resonate with SMB buyers:

  • Improvements to system security, especially in highly regulated industries such the financial sector
  • Wireless networking and functionality, especially if it involves additional Internet connectivity and bandwidth
  • Business intelligence software designed to work with both structured and unstructured data