• Chart: Four Attitudes Toward Technology

Small businesses, defined by Microsoft as companies with fewer than 50 employees, have largely eluded Microsoft’s efforts to sell them software more advanced than OEM versions of Windows and Office. While many have PCs, far fewer have networks, servers, and server applications. Through research into how small businesses think about technology, Microsoft has begun to understand what makes them different, and is planning new marketing, branding, and partner efforts to better tap this large market. While success would be sweet, parts of the strategy are largely untried and rely on partners that have little experience selling technology.

The Small Business Market

Worldwide, the small business technology market comprises more than 40 million small businesses that own at least one PC. These businesses spent about US$280 billion on technology in 2003. Growth appears to be healthy: according to market research firm AMI, small business technology spending grew 11% in 2003, and Microsoft estimates it will hit US$400 billion worldwide in 2006.

Such numbers have many technology vendors salivating about the possibility that sales to small business could compensate for static enterprise technology spending. For example, about 24 million small businesses have more than one PC, but only about 6 million have a server. This leaves a market of about 18 million businesses that are good candidates for their first server, which in turn can run applications such as Microsoft’s Customer Relationship Management (MSCRM) software. Penetrating just 5% of the world’s small businesses with MSCRM would generate more unit server sales than penetrating 100% of the world’s mid-size (50 to 1,000 employees) businesses.

However, such dreams are largely unrealized because small businesses are a particularly hard sell for software companies. The main problem: profits from a software sale to a small business rarely justify the time required to identify promising leads, educate the business owner (who makes most of the purchase decisions) about the technology involved, and close the sale.

During its 2005 fiscal year (which started July 2004), Microsoft hopes to start breaking the small business sales barrier. To accomplish this goal, Microsoft will rely on research it has conducted and sponsored to shed light on better ways to sell to small business, and on more incentives for partners, who usually make up for modest small-business software sales by providing services to small businesses (few of which have in-house IT staff).

Small Business Research

In an effort to discover the keys to success in the small business market, Microsoft’s small business team spent much of its 2004 fiscal year (July 2003 through June 2004) conducting in-depth market research, going so far as to hire anthropologists to study small businesses in the same way that they might study a distinct ethnographic culture.

The research uncovered key data about small business attitudes toward technology, who makes decisions about technology in small businesses, and marketing channels that can influence them.

Attitudes toward technology. For some small businesses, technology has a mere utility function. It is not critical to their business and offers no strategic advantage. Others see technology as a basic productivity tool which is purchased or upgraded as needed, while others build their business around the latest technology. To help convey a more complete image of these different types of customers at product and sales team meetings, Microsoft has created "personas," fictional "composites" (sometimes played by actors) who epitomize four different types of small business. (For a brief description of these types, see the sidebar "Four Attitudes Toward Technology".)

Who makes decisions. Unlike mid-market companies and enterprises, where technology professionals play a very significant role in technology purchases, the technology decision-makers in small businesses are primarily the business owners, who may be tradespeople or entrepreneurs with no technology background. The issues that influence them are often different from those that influence technology professionals. For example, they may have less stringent security concerns than large companies, but put more emphasis on cost and ease of use. They rely on a wide range of small consultants, business associates, and family members for technical advice.

Marketing influences. In the past, Microsoft assumed that "overspray" from technology marketing to mid-size and large businesses, and from lifestyle and services marketing to consumers, would cover the small business market. But most small business owners do not read technology publications or Web sites, and many do not view business-oriented media (other than material related directly to their business, such as trade publications). On the other end, mass-market advertising aimed at consumers is too general for small business, and using mass media to deliver narrowly focused messages to a huge variety of small businesses is very costly.

Small Business Strategies

Based on its research, Microsoft has redesigned its approach to small business for the 2005 fiscal year. The company will use findings from its research to review current product development and marketing plans, will try to better identify partners who work effectively with small business, and will explore a variety of new marketing channels to better reach small businesses.

Product development and marketing. Microsoft will attempt to better map small business requirements, as determined by its research, to the features that show up in the products Microsoft wants to sell them, such as Office, Small Business Server, and MSCRM. In an effort to give its small business products a higher profile in retail stores, where small businesses often purchase software, the company may develop more small business bundles, similar to Office Small Business Edition and Small Business Server, that consolidate popular small business applications into a single purchase and installation process, says Steve Guggenheimer, vice president of small business strategy in the Small and Mid-Market Sales and Partner (SMS&P) Group.

Based on evidence that bCentral, a Web site that provided hosted services for small businesses, didn’t stand out as a popular information source for small businesses, Microsoft has refashioned it as Small Business Center, which has a clearer small business focus and will be available in more regions and languages.

Identify small business partners. One finding from Microsoft’s small business research is that small businesses prefer to work with other small businesses. Many Microsoft partners are small firms that have built their own businesses around small business computing, but because they were small partners they received less attention in the past than partners that drove higher revenues. Microsoft will make a greater effort to identify partners that have been successful with small businesses (for example, partners that sell large quantities of Small Business Server) and will tap their experience and knowledge about the market to develop more effective small business products and strategies. In September, the company will roll out new marketing literature and Web sites that better target small business concerns and that will help partners sell more effectively to small business.

New marketing channels. If mass-market advertising and technology publications don’t reach small businesses, who does? One answer from Microsoft’s research is that small businesses purchase services and have business relationships with a wide variety of nontechnology companies, such as payroll-processing firms, shippers, banks, chambers of commerce, and trade and professional associations. Microsoft wants to build stronger relationships with these organizations and work with them to market products to their small business partners.

For example, Microsoft’s research shows that pro-technology executives in small companies are highly likely to use smart phones and to purchase advanced telephone services. By working with telephone companies, Microsoft can identify small business owners who purchase advanced technology and services and can develop joint offerings with the telecommunications companies whose services small businesses use. One example is an arrangement with BT (formerly British Telecom) to sell Web site services and Office software to small businesses in the United Kingdom, with marketing and support provided primarily by BT.

An Untested Strategy

While research is a solid foundation for successful marketing and development, it does not guarantee success, and Microsoft’s small business strategy is likely to undergo fine-tuning as the company gets feedback from the small business market. Small business diversity and the effectiveness of nontechnology channels in selling technology are two areas where even more research might be required.

Small business diversity. The small business arena has such great diversity that even the subsegments Microsoft has identified will probably miss significant numbers of customers. Microsoft categorizes small business primarily on the basis of the number of employees and PCs, but some companies that meet the definition of small business by these criteria may not fit the mold in other respects. For example, some companies that offer professional services, financial services, or real estate management have revenues more typical of mid-market firms. A small business market model that does not account for these variations might miss some of the best potential customers, and Microsoft is debating whether its model needs to consider other factors, such as the number or type of servers in use.

Limits of unconventional sales channels. An alliance with a bank may be effective in positioning Microsoft as the ally of a company that a small businessperson already trusts, but banks (as well as shipping firms, payroll-processing companies, and other unconventional Microsoft partners) rarely put much technical expertise at the point where they intersect with small business customers. As a result, they may be successful in selling the Microsoft brand but less successful at selling actual products and services.

Resources

Small Business Center is described in "Small Business Center Replaces bCentral" on page 23 of the May 2004 Update.

The Web hosting and Office subscription partnership with BT is described in "Hosting Deal Signed with BT" on page 36 of the June 2004 Update.

Microsoft’s strategy in the small and mid-market segments is outlined in "Microsoft Fights for the Small and Middle Market" on page 21 of the Feb. 2004 Update.

Server opportunities in the small business market are described in "MSCRM Leads Expansion of Small Business Channel" on page 20 of the Sept. 2003 Update and "Microsoft Luring Small Businesses to Servers" on page 19 of the Nov. 2003 Update.