What is the argument for staying with SMB while going up-market?
I think more and more, companies are staying with SMB too. I could list many examples: Hubspot, Slack, ZenDesk, Github, Gitlab, all cloud platforms, and not only WP Engine but all our direct competitors.
The reason to leave SMB behind is ARR growth and margin expansion, and sometimes fewer competitors. All of those are good strategic reasons, so the company’s aren’t necessarily wrong for shifting their attention. It’s also hard to maintain a product that serves many customer segments – not impossible, but hard – so it’s also a good strategy to not tackle that particular problem, and stay focussed on a segment, even if that segment changes.
However, there’s lots of advice from solid pundits and investors online, who say you should never give up the SMB market. Jason Lemkin comes to mind immediately. Why is this a good strategy?
One major one is that SMB is where the “N” is. N has a lot of benefits – attention, lots of users. Lots of users means lots of feedback. It means people are constantly changing jobs and maybe taking your software into the new job. There’s a lot of data, which means you can detect subtle things, which means your optimization or customer dynamics can be more data-driven.
Another is going global – there’s even more SMB vs ENT outside of the USA, and even more outside of Europe. The best way to grow in India is not to go upmarket.
Another is that it keeps your operations efficient; low prices means your service and infrastructure need to be efficient. With ENT, that translates to even higher margins. A counter-point is that you’re not built for the needs of ENT, but at least you’re keeping your baseline low, which can lead to higher margins than competitors who feel they can burn margin to win higher ARPU.
Another is that SMB and ENT growth can be uncorrelated, because the market forces are different, and the reasons people buy the software might be different. As an example, WP Engine at its lowest price is still 10x more expensive than a commodity shared host, therefore for SMB WP Engine has the “differentiated best” competitive strategy (using Michael Porter’s language). Whereas in the Enterprise, where the main website is probably on Adobe Experience Manager or something else that costs millions / year to develop and maintain, WP Engine’s expensive plans are the inexpensive option, so we’re the “low-cost leader” using Porter’s language. So it might make sense that, for example, in a bad economy, SMB and ENT might have different behaviors based on those different positions.
In any portfolio theory, having uncorrelated assets yields stability, at the expense of maximum single-year growth. Ideally, still maximizes long-term growth, or at least does on a risk-adjusted basis. In that language, serving both SMB and ENT is a diversified portfolio, which for a maturing company is a strength, because it means it can be more predictable.
I started by mentioned some of the counter-points. There are many more. Therefore I think both strategies are valid and wise. The only thing I believe is unwise, is taking some choices from strategy A and some from strategy B. That’s just a confused and bad strategy!
So pick one or the other, and make consistent decisions based on that choice.