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Microsoft Corp.’s recently disclosed plan to tailor products and programs for small businesses separately from those it designs for midsize companies vindicates the belief many in the channel have had a long time: A universe of differences separates small businesses from those that are midsize.

IT vendors tend to target the SMB (small and midsize business)market as if the two populations were a single entity, but small businesses act quite differently from midsize companies.

IT buyers at small companies often are the owners themselves or even an office manager. They typically have no IT department, and their cash flow is tight.

“Small companies do not have deep pockets,” said Darren McBride, CEO of Sierra Computers Ltd. and Highly Reliable Systems, Reno, Nev. “The price of the product is huge. They desperately need training but don’t realize it. They won’t spend the money or time on training and don’t realize what it costs them not to do it.”

Midsize companies, however, can be large enough to act as smaller versions of those large enough to be considered “enterprises.”

They tend to have IT budgets and staff. Purchasing decisions, or at least recommendations, are more likely to originate in the IT departments than at the company ownership level.

McBride says he believes Microsoft is on the right track by acknowledging the need to separate small from midsize companies.

“It’s like they finally heard me. For years I’ve been saying the big vendors don’t get that the S is different,” he said.

Microsoft’s strategy covers products and programs. For instance, the company has a Windows Server bundle designed specifically for midsize customers, which Microsoft defines as having 25 to 500 computer seats.

On Sept. 7, the vendor is holding a business summit to announce products and programs targeted at midsize businesses.

In addition, the software giant is planning to launch a program that will designate channel partners doing business with companies with 25 employees as “Small Business Specialists.”

The “Small Business Specialist” designation “is an excellent way for resellers to go after this segment, with Microsoft helping them along the way,” said Bob O’Malley, senior vice president of U.S. marketing at distributor Tech Data Corp., Clearwater, Fla. “Small businesses have little or no IT staff and therefore could benefit from some extra hand-holding.”

Brian Okun, director of strategic partnerships at CHIPS Computer Consulting LLC, a Microsoft Certified Partner in Lake Success, N.Y., said Microsoft’s strategy and Cisco Systems Inc.’s acquisition of Linksys two years ago are part of an evolution in how IT vendors approach the market.

Click here to read more about Microsoft’s partners questioning the company’s vertical push.

Whereas in the past many focused primarily on the enterprise because that is where much of the revenue potential was, vendors more recently have turned to small and midsize businesses for new growth opportunities, Okun said.

The further fragmentation of their approach by acknowledging differences between small and midsize businesses is the next step in this evolution, he said. Even more fragmentation will come as vendors hone their marketing strategies, he said.

“Eventually, it’s going to be the Ss, the SMs and the Ms, and, let’s call them, the M-pluses,” Okun said.

“It’s definitely not a one-size-fits-all market,” said Mark Scott, CEO of N-Able Technologies Inc. of Ottawa. And as such, vendors that in the past did not take the small and midsize markets too seriously because they were more focused on the enterprise, now are finding they have to tailor their approach to fit the target market, he said.

This is especially necessary for companies delivering managed services, through which a VAR, integrator or service provider takes over part or all of a customer’s IT functions, Scott said.

“The sub-100 user market tends to not have an IT department,” he said. But in the 100-to-500 space, companies have one or more IT technicians, which has an impact on how many IT functions a service provider would handle. “It’s very important to segment your customers,” Scott said.

Segmenting makes sense.

N-Able is the maker of the OnDemand managed-services platform, which gives service providers remote access to their clients’ systems and applications.

Colby Weaver, vice president of sales at document-imaging software vendor Questys Solutions, Mission Viejo, Calif., said Microsoft’s strategy to separate small and midsize companies makes sense, and it is in line with how Questys approaches its own customers.

“That is precisely why we designed Questys Pro exclusively for both the S and the M in SMB. While there are some general business issues that companies of all sizes face, some of the more common differences between a small company and a larger mid-sized company lie in scanning needs, remote access, security, document workflow and data-entry automation,” he said.

For small companies, Colby said, key buying factors center on compatibility, ease of setup and use, vendor viability and affordability.

“While midsize companies also make purchasing decisions based on these same factors, they also heavily consider product scalability,” he added.

Chris Redshaw, president of Future Vision Inc., a VAR in Raleigh, N.C., said she likes Microsoft’s strategy “if for nothing else, the cost factor.”

Microsoft products are expensive, to the point of becoming prohibitive for some of her smallest customers, she said.

“I just priced out 125 copies of MS Office last week, and the cost is very high for a small business,” she said. “Microsoft should evaluate their pricing structure; they have users right where they want them, and many customers feel stuck. The only discounts you get are if you are buying in volume, and even then, the discounts are not significant.”

Sierra Computers’ McBride suggested Microsoft develop products for small customers that can be expanded as companies grow. This has been a problem that results in small businesses ending up with “dead-end” products.

“The typical approach is Microsoft’s Small Business version of Win2K3. In the past there was no easy, inexpensive upgrade path.

Microsoft has to allow us to add a second domain controller or expanding beyond 25 users in the future by paying some reasonable upgrade fee without making us do a complete forklift upgrade,” he said.

Providing a clear upgrade path is important, said Chris Backe, director of sales at VARStreet Inc., Santa Clara, Calif.

VARStreet, which makes an e-business platform VARs use to build storefronts and source product from suppliers, has entry-level and enterprise versions of its software to suit the needs and budgets of its customers, Backe said.

“The key is making sure VARs can easily migrate to more robust versions of our XC store software as their business requirements change,” he said.

McBride also suggested that Microsoft invest more in co-marketing with resellers, with trusted advisers guiding small businesses through the IT buying process.

“Microsoft should spend their marketing dollars in co-sponsoring small business ‘lunch and learns’ with the small business reseller heavily involved in the presentation,” he said.