SMB Markets on the rise

It’s a commonly held belief that the big money is in selling as much product and service to the biggest customers you can find.

Place your bets on that thinking and you’ll miss one of the fastest growing markets in Canadian IT.

Canada’s small- and medium-sized businesses (SMBs) account

for an increasingly larger slice of the IT spending pie and smart vendors are adapting their sales practices to cater to this lucrative segment.

While SMBs typically employ fewer than 500 employees, their buying power is immense. Indeed, smart IT vendors are beginning to understand the influence of the purchasing behaviour of SMBs and comprehend the size of the opportunity.

According to the latest research from IDC (Canada) Ltd., SMBs represent 26 per cent of the total IT market here, spending roughly $8.96 billion each year on hardware, software and IT services. Considering the entire Canadian IT market is worth about $35 billion, that’s an unusually large slice for such small companies to be biting into. And it’s poised to get even bigger.

“”IDC expects the SMB market to outpace the broader IT market,”” says Michael Hyjek, analyst, customer segments for IDC, based in Toronto.

Over the next five years, it is expected to grow at a relatively healthy 3.4-per cent compound annual growth rate, compared with 2.5 per cent CAGR for the broader market.

Increasingly, that spend is centering on services. There are about 400,000 companies in Canada in this arena, making up roughly 11 per cent of the total IT market. With hardware prices sliding and PC sales still soft, SMBs are seeking outsourced business services, such as Web site hosting, to increase sales efficiency and boost the bottom line. That spells growth opportunity.

IDC estimates that the services segment is growing at 5.8 per cent CAGR — almost double the 3.6 per cent CAGR that software is expected to clock in, and light years ahead of the 1.4 per cent growth rate that hardware can expect to see.

Web site hosting is by far the most commonly used service — close to half of SMBs currently outsource their hosting needs — but research points to remotely managed desktops, networks and operations-related services as being high-value areas for astute VARs to focus on. But while hardware isn’t expected to show the stellar growth figures that services are, there is positive news for resellers looking to unload some inventory. Signs suggest the recession in the Canadian networking market, which took a major hit when the Internet bubble burst, has bottomed out.

During the third quarter of 2003, revenues from networking equipment were five per cent higher than in the previous quarter, according to Evans Research Corp.

And there’s even more good news for hardware. Sales of LCD monitors are showing “”unbelievable growth”” as vendors continue to see declining interest in aging cathode ray tube (CRT) products.

Why are SMBs flourishing when their larger cousins are cutting back capital spending? Experts say smaller companies are better able to prevail over economic shocks than their larger counterparts.

Canada’s relatively strong fiscal health, coupled with low inflation and interest rates, is allowing SMBs to grow their business and, in turn, spend more on products and services. And despite being a headache for exporters, the rising loonie is helping, not hurting, capital spending.

If you’re still not convinced of the buying power of the smaller guy, consider this: There are about one million incorporated companies in this country, and 75 per cent of them have less than five employees. In fact, SMBs represent about 45 per cent of the Canadian economy. Part of the reason smaller companies account for so much heft has to do with their use of technology.

To maximize sales revenues from SMBs, technology firms must be aware of the spending behaviours and intentions of these companies.

“”With over a million SMBs in Canada, the challenge vendors face is breaking through the diversity to identify who they should be targeting and how,”” says Hyjek. “”Reducing their overall cost of sale is a key to being successful in the SMB market.””

Success in cracking the SMB market hinges largely on developing effective segmentation and channeling strategies in order to navigate the priorities of the different clusters within this market.

Winning over your customers one at a time remains a timeless strategy. Research shows that supplier loyalty is at an all-time high; half of SMBs deal primarily with one IT supplier, and most plan to keep it that way.

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Jim Love, Chief Content Officer, IT World Canada

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