Winning the SMB tech market in a challenging economy

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Small and midsize businesses (SMBs) represent a massive segment of the US economy—44 percent of GDP, close to half of all employment, and half of the roughly $370 billion in overall tech spending.1 In some technology segments, such as telecom and electronic devices, SMBs spent more than the large-enterprise accounts that providers have historically pursued (Exhibit 1). But though the SMB market is collectively large, it is very different from the traditional enterprise segment: its distinct challenges include a highly competitive vendor ecosystem and a fragmented customer base. Tech suppliers cannot simply apply their enterprise portfolio and channel strategy to SMBs and expect it to work. To succeed, they must understand the SMBs’ unique buying preferences and unmet needs, and tailor their products and commercial approaches accordingly.

McKinsey recently surveyed approximately 3,500 US SMBs to understand their technology needs, buying preferences, and growth outlook.2 We supplemented that research with our extensive experience serving leading technology companies on SMB-related topics. Through this research and client service work, we have developed an in-depth understanding of what SMBs look for from technology providers and how providers can meet those needs more successfully.

Small and midsize businesses outspend large enterprises in most technology categories.

A challenging economic environment

SMBs are highly affected by the current economic headwinds and now weigh each purchase much more carefully. We found that 37 percent of SMB owners cite inflation as their biggest challenge—the highest percentage in 40 years. One in five expects growth to slow, and talent is a challenge amid the Great Attrition. Some 50 percent of business owners report difficulty filling open positions, and roughly 90 percent report few or no qualified candidates for them.

In this environment, many SMBs plan to cut their spending on technology regardless of top-line performance, probably to prepare for a prolonged period of economic uncertainty (Exhibit 2). One in four businesses expects to reduce its technology spending by up to 25 percent in the next 12 to 24 months. For SMBs with more than 25 full-time-equivalent (FTE) employees, budget cuts in IT could rise as high as 30 percent.

Small and midsize businesses are decreasing tech spending overall, although spending across categories varies based on company size.

However, not all technology spending is equal in the minds of SMB decision makers. Connectivity remains a core expense, particularly for smaller SMBs that invested more in fixed internet and mobile during the second half of 2022 than in the first half. Hardware and cloud outlays remained stable for smaller SMBs. Larger ones cut spending across product categories; per-FTE expenditures fell by more than 15 percent for fixed internet and mobile, laptop and desktop PCs, and software for communications, file sharing, and storage, for example. As employees return to the office or embrace a hybrid working model, larger SMBs could streamline their use of software licenses and increase the length of their hardware replacement cycles. Expenditures for enterprise-planning software remain stable for larger SMBs because functions such as HR and accounting remain core to their business operations.

How SMBs are responding

In this increasingly uncertain and volatile environment, SMBs are evolving their purchase patterns. Interviews and insights from our survey confirm that these companies—especially those with more than 100 FTEs—are becoming more sophisticated in their spending decisions, which are guided by four best practices (Exhibit 3).

Small and midsize businesses are using more sophisticated procurement approaches to reduce tech spending, such as centralizing purchasing decisions.
  1. Centralizing purchasing decisions. An overwhelming majority of SMBs have moved away from a federated model to centralize purchasing decisions. Among businesses with more than 25 FTEs, 37 percent say that the IT department is expected to hold more power in decision making during the next 12 months, and the percentage is even higher for those with more than 100 FTEs (40 percent). Owners and CFOs expect to make the final decision but increasingly rely on their IT teams’ expertise to understand the requirements and pricing for tech products and services. SMBs with locations in multiple US states are becoming more aware of errant subscale spending across important technology categories, such as wireless, wireline, and device purchases.
  2. Digitizing and building procurement capabilities. The procurement capabilities of SMBs are also becoming more sophisticated. Best practices that have recently become more common include soliciting requests for proposals (RFPs) from multiple providers, conducting extensive competitive research before making purchase decisions, and price shopping across resellers, value-added resellers (VARs), and direct channels.

    The role of emerging centralized marketplaces has made such price comparisons easier. Approximately 60 percent of SMBs (and 75 percent of those with fewer than 25 FTEs) have purchased products from Amazon. Amazon also boasts 90 percent satisfaction among SMBs, in all likelihood because of its competitive, transparent pricing, without compromises on product quality—the top attributes for satisfied buyers.

    Resellers and VARs should heed these trends. SMBs increasingly prefer to have direct relationships with technology suppliers rather than go through third-party sellers. That’s particularly true for SMBs with fewer than 100 FTEs, which have simpler technology requirements and are about twice as likely to go directly to providers. Resellers and VARs can thrive by becoming genuine partners for SMBs—helping them think through their current and future tech requirements, finding areas to optimize costs, and moving beyond basic procurement.

  3. Experimenting with flexible and usage-based consumption models. Cost considerations have led SMBs to experiment with new consumption models. In fixed internet, for example, two out of five SMBs prefer month-to-month pricing over annual contracts. Monthly pricing is even more common among very small businesses: more than 50 percent of them prefer to avoid longer contracts. As for infrastructure, the majority of SMBs base payments solely on usage—not on traditional monthly or annual fees—and are moving their infrastructure to the cloud and to software-as-a-service (SaaS).
  4. Trying products and services before purchase. Finally, SMBs increasingly test products through trial periods or start with “freemium” models before they purchase software. About 50 percent of SMBs do still favor traditional software subscription terms, but more than 20 percent now experiment with freemium models. This trend is even stronger among smaller businesses: 30 percent of solopreneurs now experiment with them. Using such models and trial periods to attract very small businesses early on creates a natural advantage and incumbent status when they grow and look for larger-scale solutions and contracting.

Monthly pricing is common among very small businesses: more than 50 percent of them prefer to avoid longer contracts.

Industry leaders are adopting new practices to win the SMB market

Providers must be nimble and responsive to these changing SMB needs (Exhibit 4). Leading companies are now applying several best practices. Others can learn from them.

As the tech spending mix for small and midsize businesses evolves with growth, successful providers adapt and cater to these changing needs.

Shift the conversation from price to value

In an inflationary environment, pricing is crucial: 40 percent of SMBs will consider switching providers if they can get a better deal. The smallest companies are even more likely to do so: among companies with fewer than 25 FTEs, 60 percent indicate that they will switch providers in response to any increase in price. By contrast, larger SMBs tend to take a more comprehensive view of value. Businesses with more than 25 FTEs are approximately four times more likely than other SMBs to factor in the quality of support and technical specs when they make tech-buying decisions.

Leading providers are therefore taking steps to deliver the best value to customers. First, they communicate a holistic value proposition by emphasizing superior performance, technical reliability, and responsive customer service. Second, they invest in backing up those claims to ensure that products and services are indeed reliable and that customer service is responsive and knowledgeable. This approach can be an effective differentiator against competitors seeking to compete purely on price.

Last, leading providers make it a priority to understand SMBs’ evolving needs and use those insights to provide a distinctive user experience and knowledgeable technical advice. A constant dialogue not only provides a window into changing customer preferences but is also far more effective than outbound sales calls in retaining and cross-selling to customers when contracts come up for renewal.

Create a seamless end-to-end digital experience

Digital is the preferred channel for all stages of the buying pathway, from research to purchase to after-sales support. Almost half of all small-business orders are placed through digital and e-commerce platforms. Small businesses now use digital channels (such as a provider’s website or mobile app) 20 to 30 percent more frequently than they do unassisted “analog” channels (for instance, phone calls with automated response). “Assisted” channels, such as chat and email, are even more popular among SMBs than pure self-serve options, like company websites. Perhaps not surprisingly, traditional phone-based service and support is falling out of favor, and demands for digital, particularly for support and service, are rising. Less than 15 percent of SMBs want to interact with providers through phone and automated-voice systems. These channels have some of the lowest channel satisfaction scores—more than 60 percent of SMBs express dissatisfaction with them.

A leading North American telecom player responded to these trends by transforming the digital experience for SMBs across the entire life cycle, from sales to servicing. For example, it created personalized messaging for specific SMB personas and helped SMBs to better understand key elements such as product use cases and simplifying the buying experience. As a result, the company increased the number of its new customers by 30 to 70 percent (varying by product line) while cutting marketing expenditures in half. It also generated a twofold increase in digital usage by SMBs while reducing their service requests to the call center by 25 percent.

In product bundles, focus less on cross-selling and more on customer success and customization

SMBs typically procure multiple products within a given tech category but won’t necessarily purchase them from the same provider: approximately 70 percent of SMBs purchase multiple telecom and software products, for example, but half prefer to buy best-of-breed products rather than bundled ones. Some SMBs said that the items in a given bundle did not always meet their needs—an understandable attitude given the wide range of business models, focus areas, and other attributes among the millions of SMBs in the United States. What’s more, some providers take product bundles for enterprise customers or individual consumers and market them to SMBs with minimal changes.

Sellers have a clear opportunity to cross-sell and to create “stickiness” by offering customers a more personalized segmentation: product offers and marketing organized by customer verticals yet flexible enough to allow alternatives reflecting customer preferences. Product bundles need not be complicated or granularly customized. Providers can instead consider bundles tailored to the industries of SMBs, anticipating their specific needs without overwhelming them with a plethora of choices.

Technology arrow circuit

The digital reinvention of enterprise tech go-to-market

Providers should also consider allowing customers to design their own bundles with a vetted menu of choices or at least to opt out of individual products and services not relevant to their needs. Consider the practices of a leading software company that tailors the onboarding process in line with the principle of customer success. SMBs that need advanced solutions (such as advanced pricing and inventory management) get more detailed walk-throughs and more comprehensive ongoing support after they buy. The software company monitors usage among new customers, and internal flags identify low-usage situations. Say, for example, that a customer buys a software subscription but doesn’t take a specific step (such as linking a bank account) within a predetermined window of time. The software company’s customer success team receives a recommendation to follow up and support the customer through the onboarding process.

Personalize outreach to customers

Outreach to SMBs resembles the personalization revolution in B2C. Providers are well-positioned to use best practices for handling first- and third-party data, developing microsegments, designing outreach journeys, launching personalized campaigns, and monitoring and evolving them with the test-and-learn approach.

To enable high-velocity, always-on, personalized campaigns, a leading North American technology company, for example, continues to invest heavily in its end-to-end marketing technology stack. The company has created a holistic view of customers by setting up a customer-360 platform that combines disparate data sets with profile data (customer size, industry, revenue), data on behavior (digital activity, call center activity), and data on intent (future technology plans). It then runs advanced propensity models to prioritize the next-best action for approaching the customer. Most important, the company monitors these actions closely and uses this information to adjust its strategy. As a result, campaign cycle times have gone from months to days, conversions have increased more than two times over, and overall top-line revenues in the SMB segment have grown by more than 20 percent.

The approaches discussed here aren’t academic. Market-leading companies are already using them at scale and starting to see results, though very few have taken a comprehensive, end-to-end approach. Our research, conversations, and experience working with technology companies confirm that most leading companies excel in one of these dimensions and that a select handful rank themselves as well-performing across two. This is a missed opportunity. The four best practices outlined above generate disproportionately positive returns when applied synchronously. The sum is truly greater than the individual parts.

There is tremendous value in the SMB market for technology, but companies can’t reach these buyers by simply replicating enterprise commercial approaches. Instead, they must understand the needs of SMBs—particularly in the current economic climate—and tailor their approach accordingly.

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