The small & medium business (SMB) segment is a very attractive one for many SaaS founders. In the US alone there were 5.6 million SMBs in 2011 (= businesses with less than 500 employees) with 90% of them having less than 20 employees (= 5 million). In France, out of a total of 3.1M businesses in 2011, 128k had between 10 and 250 employees and 3M had less than 10 employees. Same for Germany with more than 2M SMBs.

A very common strategy, when starting on the SMB segment, is to first focus on a niche, to dominate it and once successful to expand.

If the first phase of this strategy is relatively feasible for many SaaS products, it’s a whole other story when it comes to really scale it.

Distribution / acquisition: you’re running after a (very) fragmented market

One of the biggest challenges is to scale distribution / acquisition. Since targeting SMBs implies having a low price point, you need to acquire as many customers as possible without spending too much for each of them. And since the SMB segment is a very fragmented one (see it as a collection of niches rather than a big coherent market) it can be a daunting task.

This why when you analyse the strategy of software companies which are really strong on this segment you’ll notice that a common strategy is not to target the end customers directly but to focus on where you can get a “bunch of them” at once.

Xero, an accounting SaaS for SMBs, puts a lot of effort in acquiring accounting firms. Since each accounting firm works with an average of 13 small businesses, it’s faster to scale acquisition by convincing the accountant to migrate its own customers to Xero.

Stripe is another great example. They provide the payment platform to websites like Twitch (video games streaming) and each user of Twitch has to create a Stripe account if he wants to collect money.

Product: it can be extremely hard to make a “niche” product evolve

A more overlooked challenge is the product one. The advantage of starting with a niche rather than having a “global” approach is that you can develop a product which will answer the precise needs of your customers. From feature prioritisation to UX/UI choices your product development will stick to these needs and in many cases it will be easier to outdo the competition.

But in the SMB segment, very often, what works for a specific type of customers might not work for another one because their needs are slightly different. This is why you find a lot of feature overlap and feature creep in products for SMBs.

Like the “contact management” feature which you probably have in your sales tool, CRM tool, invoicing tool, support tool… A “sales heavy” business might need to manage its contact directly its sales tool while other types of businesses might prefer to do it in their CRM or marketing tools (they’ll use the sales tool only for the sales pipe feature). This is why you end up having the contact management feature everywhere, even if, ideally, you would need it only once but with clever integrations to let data flow between tools.

Product management for SMB software is an extremely difficult exercise once you start to change gears from “niche” to ”global”. Appealing to a specific target is doable, appealing to many is much harder.

Competition: you will make (plenty) of new enemies

When you want to grow bigger than your niche the competition can become much fiercer. As we’ve explained, it’s easier to outdo the competition (in terms of product) when you focus on a niche, but once you go global you are suddenly competing with:

• products which are less specialised but appeal to a larger customer base (who don’t need a laser focused tool)
• global players like SalesForce which cover a large part of the market and are very aggressive protecting it
• other specialised products in the other niches you’re expanding into

Lifestyle business or growth company?

The beauty of the current SaaS environment is that it has never been easier to launch a niche product and to live out of it. Many SaaS founders / small teams make a decent living this way and the “lifestyle” SaaS companies trend will probably only grow (which is fantastic for the majority of founders).

But if you choose the path of the “growth company” then you’ll face totally different challenges.