Cracking the Small and Medium Business Market

Many technology suppliers have found that their largest global accounts have become increasingly competitive and marginally profitable. Firms seeking profit growth are turning to the small and medium business (SMB) market. But this market requires a very different business design from the global account model. Which customers a company chooses to serve, the value proposition it offers them, and how it captures value can make or break a foray into this territory. Oliver Wyman has pioneered the Customer Value Engineering approach to help technology suppliers address the SMB market profitably. The results for our clients have been significant growth in revenues, profit margins, sales close rates, and average deal size.

Oliver Wyman has proven experience in helping to generate profitable growth in the SMB market.
or many technology companies, the market for SMB customers looks very attractive. It totaled over $250 billion in 2003 and is increasing at 6-8% per year. Compared to large enterprise accounts, where competition is intense and cost-to-serve is high, SMBs appear to many to be an appealing alternative: a mass market that can be served through low-cost channels using a stripped-down version of existing offers. As many companies have discovered to their regret, however, this is a dangerous oversimplification. The SMB market is not homogenous on any dimension including profitability. Distinct customer segments exist, with high variance around the factors that drive purchase decisions. Channel management is more complicated, and customer acquisition costs can destroy account profitability. Finally, more and more competitors are serving the market with focused business models. Exhibit 1 Decision factors for a technology product
100%
Remote management

Yet there is gold to be mined by understanding the SMB customers world. Oliver Wyman has proven experience in helping to generate profitable growth in the SMB market. Our Customer Value Engineering services are unique in that they integrate the insights and microeconomics of both customer demand and company cost, shedding new light on: How SMB buyers trade off price and product features against other elements of the value proposition: ease of use, reliability of supply, warranty terms, on-going support The range of channels that SMB customers prefer to research, buy, and use services which in turn informs channel strategy and channel portfolio management The relative strengths and weakness of competitors, and the economic implications of competitive matching of new offers

80

Interoperability with existing technology External influence Fulfillment reliability

60
Latest features Price

Availability of installation services Service responsiveness

40
Performance and reliabiity

20

Internal influence

Delivery time Plug and play Warranty duration

0 Product related 20 Price 40 Influencers 60 Delivery Deployment 80 Use 100%

Source: Oliver Wyman client example

This approach reduces the risk of big bets.

Client results
Our approach consists of a combination of: Leading-edge customer science methodologies such as Strategic Choice Analysis, which get inside the customers world to uncover which considerations actually drive demand Segmentation based on customers current profitability to the business, differences in elasticity of their demand with respect to all offer elements, and their prospects for future growth Direct linkage of demand drivers to variable costs to show the profitability of alternate strategies Integrating these analyses into a dynamic, robust strategy platforma graphical representation of a companys business
In dozens of Customer Value Engineering engagements, Oliver Wyman has helped clients drive significant, profitable top-line growth. Example results include: 40% increase in sales 4-percentage-point increase in profit margins for a 1% margin business 30% increase in customer acquisition 20% higher sales close rate 16% higher average deal size

model, which we call an Interactive Strategy Model approach, or ISM. This allows management teams to see the relative value drivers, evaluate scenarios, and rapidly turn strategy into action with a minimum of risk For firms already operating in the SMB market, Customer Value Engineering delivers

Exhibit 2 Interactive strategy modeling (illustrative example)

1. User can vary all aspects of offers to simulate effects on
demand drivers and share
File Edit View Insert Format Tools Window File Edit View Insert Format Tools Window

2. User can clearly see how changes to the offer drive revenue

Brand List price per license Discount/Promotion Availability Customization Pre-loaded on PC Resulting share:

Tiger $55 5% 2 days Yes No 12%

Bear $75 15% 5 days Annual, free No No 7%

Cheetah $45 0% 7 days None No Yes 28%

Available market Target market

Demand drivers
Revenues

Customer base

Upgrade Monthly, 5% list

Revenue per customer Share of customers

% of market by segment

4. User can see how offer elements, demand drivers, and

cost drivers impact overall performance
File Edit View Insert Format Tools Window

3. Cost and market share drivers are dynamically linked

to changes in demand drivers
File Edit View Insert Format Tools Window

Market share
100% 80 60
27% 36% 40%

Market share gain

6% 5 4 3 2 1 0 -1 -2
5% 3%

Incremental cost and revenue

240 181

Cost drivers
Total cost

40 20 0
26% 11%

23% 25% 12%

-1%

Current

Future

Entry- Midlevel range

Highrange

300 250 200 150 100 50 0 -50 -100

Variable costs

Fixed costs

Operating costs
-50

Acquisitions costs Acquisition cost per customer

Revenue Cost Profit

Net licenses

Operating cost per license

New customers

A common currency to resolve conflict around tough decisions.

Oliver Wyman case study
immediate results. New insights into customer priorities allow managers to make short-term pricing and operational adjustments that ring the cash register within months. For any technology supplier moving into the SMB market, Customer Value Engineering creates a powerful platform for getting everyone in the organization to channel their energies in the right direction, because the process is inclusive and cross-functional from the outset. This approach lowers the risk of big bets in the SMB market by raising the odds of getting the right answer about where value is and by raising the odds of successful implementation.
A major North American wireless telecommunications provider was facing flat customer growth in consumer and large-company markets. The provider had turned to small and medium enterprises for growth and planned to launch a traditional direct marketing and mass media campaign. The firm asked Oliver Wyman to assess its prospects. We surveyed 900 corporate buyers of wireless services to understand their company types and decision-making priorities and behaviors. Our analysis revealed that there were distinct segments that required different value propositions and communications. The firm redirected resources to a more targeted marketing campaign that included intelligent algorithms for customizing Web site offers to inbound prospects.

Relevant industries
Communications Service providers Wireline and wireless firms Network equipment and software firms Enterprise communications firms Yellow pages and directories firms Application service providers Resellers and distributors Media Cable system and satellite operators DSL and cable broadband providers Internet service providers Business information services Technology Enterprise computing firms Networking firms Data storage firms Software firms IT services firms

Oliver Wyman

Oliver Wyman is building the leading global management consultancy, combining deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development. The firm works with clients across a range of industries to deliver sustained shareholder value growth. We help managers to anticipate changes in customer priorities and the competitive environment, and then design their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities.

www.oliverwyman.com
For more information, please contact: John Calhoun, +1 212 345 8282, john.calhoun@oliverwyman.com Pierre Derad, +49 89 939 49 599, pierre.deraed@oliverwyman.com Jonathan Gove, +852 2110 3314, jonathan.gove@oliverwyman.com

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