Sales & Marketing

Essentials for Selling Software to the Midmarket

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In our work at The Midmarket Institute in facilitating collaboration and commerce among midsize companies and the companies that support them, we talk with a lot of midsize companies, their advisors and suppliers. Most suppliers wanting to sell to midsize companies make a fundamental mistake: they think there is one midmarket.

There are 196,000 companies with revenues between $10 million and $1 billion. Those companies provide a third of the jobs and account for a third of the revenues in the American private sector. It’s a misguided approach to think of “the midmarket” as a homogenous group of companies just because they fall within a certain revenue or employment range. This is simply a convenient reference point for salespeople and market researchers. Unlike the German Mittelstand (the midmarket in Germany), U.S. midsize companies don’t see themselves as midsize; instead, they are more likely to identify with an industry or a locale. So, you have to first “find them” and then segment them in a way that makes sense for your product or service.

I’ve observed many suppliers go to market with their “midmarket solution.” Most of them have go-to-market and sales strategies that see the midmarket as monolithic. In reality, there are many midmarkets. The essentials for selling software solutions to midsize companies start with understanding the six segments of the market and their differing needs. If these segmentations don’t work for you, then create your own to help you make sense of the differing needs of different groups of midmarket companies that map to your product or service.

What follows is a description of the characteristics of the six types of midsize companies, along with my advice about avoiding the ”deadly duo” in selling to midsize companies, and tips for designing go-to-market approaches that are uniquely designed to fit midsize companies. I’ll also explain how the midmarket companies themselves are adding to the problem for selling to this market.

Software Needs Vary among the Six Types of Midsize Companies

1. Gazelles. These are companies that choose to grow quickly – typically by 20 percent or more per year. There are quite a few of these companies. Some examples are Sierra Nevada Aerospace, which grew revenues by 298 percent between 2006 and 2009, and Clarisonic, which grew revenues by 984 percent over the same period.

Many gazelles have enormous difficulties scaling, and they value solutions that enable them to scale quickly. Also, in a stagnant market like we have today in the United States, these companies are likely looking overseas (not all, but many of them). They will value solutions that help them scale domestically and expand internationally.

2. Small Giants.

This segment is about companies that want to be great in a particular niche. Unlike the gazelles, small giants don’t care that much about growth. They may grow a small amount one year and nothing at all the next year; but that is fine with them. What they care more about is their product, or providing a great workplace, promoting a trade or certain skills, or being a great member of their community or region. Some examples of small giants are Beryl Companies, Zingerman’s and SRC Holdings.

If you go to a small giant and try to sell them on a growth story, you’ll never get to the “on ramp” because that’s not what they value. On the other hand, if you know what they value highly, you can easily align your sales approach to what the company’s leadership is trying to build. These companies tend to have a strong leader whose views on the business are generally articulated as the company’s vision.

3. Turnaround/renewal mode. With the economy still basically in a recession, a lot of midsize companies are in turnaround/renewal mode. Midsize companies tend to rely on a few key customers for the bulk of their revenue; that’s the nature of their business. Therefore, if they lose even one to three customers, that may translate to a loss of 20-50 percent of their revenues. This is the case for many midsize companies over the past two years.

Selling software, cloud and SaaS solutions to midsize companies in a turnaround mode means you’ll need to offer a solution that takes some of their fixed costs and moves them to variable costs and allows them to better manage their cash flow. At the same time, these companies will also value solutions that will enable them to scale their business as the economy grows.

4. Acquisition mode. Many midsize companies are looking to buy other companies as part of a plan for scaling. But this is a different story than what you would sell to a gazelle, a small giant, or to a company in turnaround mode. These companies need solutions that will help them with merger integration and look appealing to a company that they seek to acquire.

5. Exit mode. These are companies that are looking to be sold. They are trying to make their balance sheet look better, trying to look more profitable. They value solutions that turn fixed costs into variable costs, as this will make them look good and improve their net operating income.

6. Family-owned business. This is an entirely different kind of company, and there are many midsize companies of this type. A family-owned business may be a high-growth company; however, it usually is driven by a different set of motivations than a gazelle or a small giant. Uncle John runs it, daughter Mary is the VP, etc., and they make decisions differently than gazelles and small giants. Most of them tend to think for the long term and their cash needs are generally linked to their personal needs. With tight credit, many of these businesses tend to self-finance with cash generated by the business.

The Deadly Duo

The majority of suppliers trying to sell products to midsize companies have two mindsets. Sales get squelched with both mindsets because they’re wrong for this market.

First, there are the suppliers that sell to the large-company market and decide to step down to the midmarket because they’ve heard it’s hot and is a huge market. Most of them are trying to meet “sales bogeys” and tend to “hit and run.” This can be a fatal mistake with midsize companies that seek reliable long-term relationships with suppliers. And, since they often don’t change suppliers, you may be shutting out customers with “short-term-itus.”

Many of the salespeople with this mindset tend to talk down to the midmarket companies and try to shove large-market products that have been “dumbed down” or “featured down” for the midmarket. This strategy will backfire in most of the midmarket except with larger midsize companies.

The second common problem I see is what I call “the trench coat problem.” Imagine that you are a salesman coming to me as a potential customer and open the left flap of your trench coat and say, “Here are the things I have to sell” and then you do that again with the right flap of your trench coat. At that point, you want me to understand what you are selling and figure out how to match what you have to my problem. You expect me to pull out my checkbook and give you money; even though you didn’t spend enough time understanding my problem and showing me which product would solve it.

Understand the customer’s challenge and sell your product only if it will help them overcome that challenge. Midsize companies tend to stick with their suppliers and advisors; so if you “make the wrong sale,” you will never get back in there.

The fundamental issue that plagues suppliers with this mindset is that they’re just selling whatever they already have to sell, rather than selling what the customer needs and wants. The solution could be adapting the product to suit midmarket needs, developing a new range of products just for the midmarket (see how big that market really is!) and leveraging avenues where these midsize companies tend to congregate (like The Midmarket Institute) so that suppliers gain economies of scale and reduced cost of sale.

How Midmarket Companies Add to the Complexities of Selling Solutions to Them

Suppliers’ lack of understanding about midsize companies’ needs is not the only problem. Part of the blame for the complexities of selling into the midmarket lies squarely with midsize companies themselves. There are two issues here.

The first issue I’ve observed is that, in many cases, midmarket buyers simply don’t understand or are unable to articulate their business problems. They tend to be hands-on businessmen who know “business speak,” not “consultant-speak.” A consultative salesman or a consultant needs to help them understand and communicate their issues; but midmarket companies dislike most consultants. They also don’t like aggressive salespeople or somebody talking down to them.

Software companies that can help their midsize customers articulate their problem will enable a buyer to figure out whether the products in the left or right flap of the trench coat are right for that customer. If you have the solution, you get the sale and the prospect of many more. If you don’t, you have at least built goodwill to get your calls returned the next time.

The second issue is that many midsize companies are big-company-wannabes. Just because Kodak or Caterpillar or some other big company uses a product, they go look at that product and are really enamored with it. Many people in midsize companies don’t understand that many of those products for larger companies will not work for them. This again can be dealt with by a consultative salesperson who helps them understand and articulate their problem, and then identifies what will work best for them at their size or use.

Best Practices for Selling to Midmarket Companies

As I described earlier, there are a lot of differences in the types of midmarket companies and what they value and need in business solutions. So the first step in selling software solutions to these companies is to spend the time to understand which type of midmarket company you’re dealing with, and then matching your pitch to that kind of company.

1. Test midmarket product ideas. Many software companies that are interested in selling to the midmarket tend to be larger companies, and they have a group of market researchers that are completely disjointed from the realities of the midmarket.

The German Mittlestand prefers customer intimacy over marketing three to one. In contrast, what I find here in the United States is an enormous focus on marketing, which is to sell the midmarket the idea that whatever the supplier has is really good for them. But the only people who can decide what’s good for the midmarket are the midmarket people themselves.

My advice for software giants is this: once you have an idea of what your midmarket products ought to be, spend time connecting with companies in the midmarket and say, “We think you have this particular problem; do you? We are thinking of creating a product like this to address that problem. Do you think it will work in your setting? What do you or don’t you want in it?”

2. Don’t “dumb-down” a large-market product for the midmarket. This is a classic mistake that many software vendors make in order to sell a product for a price that is attractive to the midmarket. It’s important to understand that selling less of a large-market solution is not the best solution for the midmarket. It may work with the top end of the midmarket and with the big-company-wannabes, but then it falls off. I’m not suggesting a bottoms-up approach; I’m suggesting the need for a good understanding of the needs of the midmarket and then adapting the product to those midsize company needs.

3. Consultative selling works much better.Helping the midsize company figure out and articulate their problem, exploring the range of solutions for it and helping them realize the business outcome will create loyal, long-term raving fans.

3. Relationship selling. It’s a mistake to generalize midsize companies as being more focused than larger or smaller companies on bonding and developing relationships with suppliers. Bear in mind the six different types of companies in the midmarket. Growth-mode gazelles, for instance, don’t care as much as small giants care about relationship selling as they are focused on growth and looking for the best supplier that will help them rid the current headache. Small giants are focused on being around for a long time to come, and they are thinking through the long term. They want to know that the software company will be around if they get into trouble. On the other hand, if you’re dealing with a turnaround situation, this type of midsize company is desperate, and their focus will be on cost rather than relationship.

The bottom line is the different segments of the midmarket have slightly different motivations for their software buying decisions. Yes, the midmarket is hot, and it’s huge. But, to be successful in the midmarket, software, SaaS and cloud companies need to understand the characteristics, needs and values of both the midmarket segment and the company the sales team targets.

Ram V. Iyer is the founder and CEO of The Midmarket Institute, devoted exclusively to providing practical information and fostering a strong community for midsize companies, their suppliers, advisors and influencers. He is an acknowledged expert on the midmarket. Ram has worked at startups, midmarket and large companies. He is a graduate of the MIT Sloan School of Management. The new beta site launches June 20, 2011.

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