There is a danger for any startup to find product and market fit at the early stages of inception. Most startup founders often reached for the market that is easily accessible to them given the lack of networks and industry experience. One segment which I often see startups stumble is in what we call and small and medium enterprises, which represents almost 95-99% of the economy which they are operating in. For Southeast Asia, it is not simple to touch this segment because the market means different things to different countries. I have worked on this segment for a few years and deliberated on the best approach to build reach and distribution whether I am in a startup or corporate setting. The problems are similar as much as the misconceptions. In this essay, I address how one should approach these issues, and hopefully guide entrepreneurs through my own learnings as well as failings. My key advice to everyone targeting this segment particularly in Southeast Asia: A lot of startups claim to focus on small & medium enterprises in their respective markets. My advice is to focus on “M” & not “S” In that market segment.
Definitions, Myths and Misconceptions in SMEs across Southeast Asia
The small and medium enterprises (SMEs) constitute almost 99% of any macroscopic economy from developing to developed nation. In Southeast Asia, this whole category differs vastly depending on the demographics and sophistication of the economy. Let me use Singapore that also have a strong presence of large multi-national corporations which placed their regional headquarters in the country. Singapore adopts the definition of small and medium enterprises with the following properties: (a) enterprises with annual sales turnover of not more than S$100 million or (b) enterprises with employment size of not more than 200 workers and claims that 7 out of 10 workers are hired in the SME market and they contribute half of the the national GDP. If you are a startup or corporation cornering the small and medium market in Singapore and seeks to extend the same across Southeast Asia, you are in for a rude shock. Let me collate a set of myths and misconceptions which I have heard from dumb executives or entrepreneurs.
Myth 1: It is simple to tell everyone that there is “economies of scale” for the SME market across Southeast Asia
This is the typical bullshit I have heard from “seasoned” executives from top technology companies and the corollary that follows after that is that there is no customisation of their products or services across the SME market in Southeast Asia. Let me illustrate using my experience. We were targeting small and medium businesses focusing more on retail, restaurants and professional services in Singapore, and it was actually alright to extend the same product to Kuala Lumpur in Malaysia, but when it comes to Bangkok (Thailand), Manila (Philippines) or Jakarta (Indonesia), the definition of SMEs becomes vague because of the existence of micro enterprises. The issue was even worse when we adjust the definition to the US market where we discovered the sophistication of the small and medium business owner actually made our business better in that market.
The problem is that you don’t deal with just small and medium enterprises, because the words “small” or “medium” are broken down into more categories. Do you consider the hawker in the wet market of Indonesia selling soft drinks a small enterprise or the village doctor in India a small enterprise? It is actually classified by some as micro businesses. In fact, companies like Coca Cola have done a lot more in customising their solutions across developed and developing markets, and successful startups actually amend how they can get paid in markets where it is harder to get one dollar from the customer. The payment methods for a small and medium enterprise across Southeast Asia also varies. You have to reverse your approach in emerging markets by identifying who should pay for your solutions if you are targeting the micro, small, medium and large enterprises.
Don’t be fooled by people telling you that Google or Facebook ads can be sold to these micro businesses. That’s the misconception of why SMEs mean different things and you have no choice but to customise your product so that you can figure out a way to build scale. This is the same way how I know if a multi-national corporation targeting this market is actually deploying the right strategy to engage this particular market segment by customisation. (This report from McKinsey reflects what accurately is happening with companies trying to expand into emerging economies).
Myth 2: If I target SMEs, I am hitting a big market
Here is how I know if the entrepreneur or executive in a corporation targeting small and medium enterprises knows what he or she is talking about. If they break the problem into verticals and specifically focus on niche markets, my view is that they understood the complexity of the problem and broke the problem of customer acquisition into small chunks. We saw that earlier in the case of Chalkboard, except that we made one mistake: we fell prey to trying to scale like big companies where we should have adopted the door to door strategy and built network effects. Upon the days when we shut down, I shared the learnings to people who are trying to do the same thing, and clearly told them that the only way to scale for small and medium businesses is to do the opposite what most people would do: sell door to door and focus on one customer at a time without too much complexity. That comes to my next point.
Myth 3: SMEs need services to be efficient, and marketing & branding to take them to the next stage
One common misconception about the small and medium enterprise is that they need similar solutions in marketing or branding like the multi-national corporation. That explains why 99% of the startups fail to find the product and market fit. Let me put it in plain terms on one of the big mistakes which Chalkboard made in the early days that will ensure its survival. It should have packaged the marketing solution it have sold similar to Groupon and focus on building the original idea of providing e-commerce instead of trying to do a location based marketing approach. If we have done that and build the network effects to scale, we would have survived (and believe me, I am not even thinking about million dollar valuations).
Being in the business serving small and medium enterprises from both startup and corporate world, I have learned three things about 99% of the small and medium business owners which I have spoken and do sales with:
- Small and medium enterprise business owners are not sophisticated and have too little time to do other things other than their core business. If you know a restaurant owner, you would know his or her focus is to get the chef to cook the best dishes, the waiters to serve the best dishes and he or she only take solutions off the shelf to collect money, and the rest of his or her time bringing customers to the restaurant. If you know a medical general practitioner, he would not care about a booking service but would want to get more patients so that he can ensure that his clinic can break even every month against rental and maintenance costs.
- Small and medium enterprise business owners care about survival and not efficiency until they become successful. That is why most of them remain in their natural state. Hence if you want to target a service towards this group, you really need to focus on their need. A customer relatonship management (CRM) system is a waste of time while a simple app that helps them to generate invoices and get their customers to pay money to them might be better.
- Small and medium enterprise business owners focus on sales and transactions above all and if you are marketing or branding startup, don’t waste their time. That’s why Groupon worked for them, even though the economics are bad for the small and medium business owners. If you can truly bring 100 more customers and generate 10 transactions per 100 to them with your service, you can easily get their attention, otherwise, don’t waste your time.
How should a startup approach the SME market in Southeast Asia
If you are in Singapore or any major city in Southeast Asia serving the top 20% of the market, you should focus on the “M” and not the “S” of the small and medium enterprises market. The reason is that the medium enterprises have already passed the phase of survival and would focus on growth, meaning that they would focus on solutions which can grant them efficiency and productivity. There is a certainty that the “M” wants to move upscale and hence marketing and branding solutions targeting towards them becomes a plausibility. That is what I have observed from both my experiences in Vistaprint & Chalkboard, and it was working well except that the challenge is to find the sales people who can target this group of medium enterprises. The problem is that they are different from the sales people stereotypes in the multi-national corporations.
The only way is to figure out the SME market by doing things that do not scale first and figure out how you can inject virality loops and network effects to scale it later. For the “S”, the key strategy is really targeting at the need of the customer, and the “M”, the focus should be about helping them to move upstream where the company is trying to streamline towards efficiency and productivity or building a brand.