STATE SMB MARKETSTATE SMB MARKETof the

for IP Communications and Cloud Services

New York-based consultancy GrowthMark has recently completed a comprehensive research study of the Small and Medium Business (SMB) market for IP Communications and Cloud Services. The study included a survey of more than 850 SMB owners and decision makers across North America, telephone interviews with more than 100 of the survey participants, and mystery shopping of

products from nearly 20 leading service providers.

The study provides valuable insights into the purchase drivers and buying behaviors of SMBs along with details of what SMBs look for in their service provider. This Research Brief provides an overview of the North American market for IP Communications and Cloud Services to help Metaswitch customers better market and sell products targeted at SMBs. It is offered as part of the Metaswitch MarketVisions program, which provides information, tools and consulting services to help service

providers launch profitable products.

“...”?

LOW ADOPTION RATES BUT BIG OPPORTUNITYLOW ADOPTION RATES BUT BIG OPPORTUNITY

IP Communications Adoption by Company Size

Plans to Purchase an IP Communications Service

Number of Employees

∗ About 20% of the SMBs surveyed are now using IP Communications with higher adoption rates for larger companies.

∗ 60% of companies who have adopted IP Communications have purchased a Hosted PBX product.

∗ 60% of companies with less than 50

employees and 72% of companies with

more than 50 employees told us they

intend to adopt IP Communications

within the next two years.

5-19

TDM Hosted IP PBX

20-49 50-99 100+

%%

> 5yr25%

3 to 5yrs9%

1 to 2yrs25%

<6mo13%

<6mo to 1yr28%

There is a strong correlation between adoption of

IP Communications and adoption of Cloud Services.

Companies who use IP Communications are 2.5 to

3 times as likely to use Cloud Services

About 20% of smaller SMBs and 40% of larger ones

have adopted some type of Cloud Service. Those

who have adopted Cloud Services regularly purchase

more than one service from a single vendor.

Since our previous study in 2010, our latest survey shows positive movement in the adoption of IP Communications and Cloud Services by SMBs. The survey found that:

0

20

40

60

80

1008% 10% 7% 11%9% 12% 15%

18%83%78% 78%

71%

research highlights: buying behaviors & purchase drivers

research highlights: buying behaviors & purchase drivers

Our research shows distinctive buying behaviors for different size companies.

Smaller companies with fewer than 50 employees

make IP Communications purchases based on business

need, not for technical reasons. Unsurprisingly, the buyer

and decision maker tends to be the owner or another

high-ranking, but not technical, officer of the company.

Their primary purchase drivers are economic in nature

and they seek to find business value in a new IP

Communications system. We strongly advise service

providers seeking to serve smaller companies to conduct

sales conversations in clear business language and to take

the time to highlight the business benefits of an IP

Communications service.

Larger SMBs with more than 50 employees show

more sophisticated buying behaviors and more nuanced

purchase drivers. The larger SMBs seek to satisfy both

business and technical needs and, often, there is more than

one buyer: a businessperson and an IT person make the

decision collaboratively. Consequently, their purchase

drivers strike more of a balance. The reputation of the

service provider is nearly as important as the economics

of the offer for them. To sell successfully to these larger

companies, service providers must address the needs of

each of the decision makers.

In past studies, GrowthMark found these buying behaviors

to be common in companies with more than 100 employ-

ees. In this study we have seen a significant shift: we now

see the hybridtechnical/business decision-making pattern

in companies with more than 50 employees. Service

providers should take note and be prepared to address

both sets of needs.

The Economics of the OfferThe Reputation of

the Service Provider

Change Event(moving, growing, etc.)

Product Characteristicssuch as Features

Less Important Important More Important

Inner Circle: <50 Employees Outer Circle: <50 Employees

13%11% 14%26%

25% 27%

29%31%

61%

61% 60%

55% 50%

17%32%

51%

25%16% 19%

34%

41%

32%

35%

32%

ip communications adoption trends by industry

Smaller companies with fewer than 50 employees

make IP Communications purchases based on business

need, not for technical reasons. Unsurprisingly, the buyer

and decision maker tends to be the owner or another

high-ranking, but not technical, officer of the company.

Their primary purchase drivers are economic in nature

and they seek to find business value in a new IP

Communications system. We strongly advise service

providers seeking to serve smaller companies to conduct

sales conversations in clear business language and to take

the time to highlight the business benefits of an IP

Communications service.

Larger SMBs with more than 50 employees show

more sophisticated buying behaviors and more nuanced

purchase drivers. The larger SMBs seek to satisfy both

business and technical needs and, often, there is more than

one buyer: a businessperson and an IT person make the

decision collaboratively. Consequently, their purchase

drivers strike more of a balance. The reputation of the

service provider is nearly as important as the economics

of the offer for them. To sell successfully to these larger

companies, service providers must address the needs of

each of the decision makers.

In past studies, GrowthMark found these buying behaviors

to be common in companies with more than 100 employ-

ees. In this study we have seen a significant shift: we now

see the hybridtechnical/business decision-making pattern

in companies with more than 50 employees. Service

providers should take note and be prepared to address

both sets of needs.

ip communications adoption trends by industry

For the first time, GrowthMark looked at the adoption of IP Communications by industry verticals. We found the highest current adoption rates in companies in the Aerospace/Defense,

Energy/Utility, Technology and Financial Services sectors.

More interestingly, we asked surveyparticipants who have not yet purchased an IP Communications service about their plans to purchase. As noted earlier, 60 to 70% of our panel told us they were likely to adopt within the next two years. When we correlate plans to purchase with industry we find that Automotive, Transportation/Logistics, Advertising, Construction, Health Care/Pharma, Manufacturing, and Media/Entertainment are the segments with the

strongest plans to adopt.

GrowthMark does not necessarily advocate development of products specifically for these verticals, but service providers would do well to carefully study the business needs of these industries and train sales teams to address

those needs with full-featured IP Communications products.

Automotive

Logistics

Advertising

Construction

Health Care/Pharma

Manufacturing

Entertainment

Industries with the Highest Percentage Planning to Adopt IP Communications

unified communicationsunified communicationsSince no industry standard definition of Unified Communications (UC) exists, we described UC to our survey participants as a service that provides:

61% of smaller SMBs and 79% of larger SMBs told us they were interested, very interested or extremely interested in UC for their business. Both groups expressed a willingness to pay extra fees per month to have access to the UC feature set, particularly when presented with a deeper description of UC features including integrated voicemail, and

call jump (i.e. the ability to move a call across devices without interrupting the call).

Service providers will need to carefully consider how to package and price UC features. Should you charge separately for UC or include it as part of a standard Hosted Voice product? Our qualitative interviews strongly suggest that

inclusion of UC with a standard Hosted Voice product can be instrumental in driving a higher sales close rate.

A consistent feature set regardless of whether an individual uses a desk phone or mobile device

A single voice mailbox and (if desired) phone number for desk phones and mobile devices

The ability to access phone system features from a computer, laptop or tablet

The ability to make and receive calls from computers, laptops and tablets using a softphone

“UC sounds really useful, unlike a lot of technology. It’s the kind of thing that would make me seriously consider the hassle of purchasing a new phone system.” - Owner, Denver-based staffing firm

Interest in UC of Companies with <50 Employees

0%

5%

10%

15%

20%

25%

30%

Not Interested

AlreadyHaveInterested Very ExtremelySomewhat

ip communications and cloud services

ip communications and cloud services

Most SMBs view the Cloud in terms of outsourced infrastructure. They are less concerned with building and managing virtualized computing environments and more interested in purchasing point-specific Infrastructure as a

Service (IaaS) products. These IaaS products included Cloud-Based email, file storage and firewalls.

Over half of our survey respondents said they prefer to purchase all of their Cloud Service needs from a single provider.

Further, there is a strong correlation between adoption of IP Communications and adoption of Cloud Services. In our study, IP Communications adopters were nearly twice as likely to use Cloud Services for some or all of their

infrastructure needs.

To take advantage of these findings, GrowthMark recommends that service providers strongly consider develop-ment of a comprehensive SMB product portfolio that includes IP Communi-cations and Cloud Services elements.

None 40%

Email Servers 34%

Storage/Backup 32%

Web Servers 23%

19%

19%

18%

7%

Anti-Spam/Anti-Virus

Business Applications

Security/Firewalls

VirtualizedComputing

Cloud Services used by Companies with <50 Employees

“The Cloud has made my life

better. . . . If I have my way, this

company will never purchase

another piece of hardware again.”

- VP IT, Seattle-based food distributor

the competitive landscapethe competitive landscapeIn addition to the decision-maker research described above, GrowthMark also assessed the

competitive environment using mystery-shopping techniques. Using a variety of SMB personas (e.g. a 15-person accounting firm looking to upgrade its phone system), GrowthMark was able to obtain pricing for Hosted and Premises IP PBX offers from more than 20 leading service providers

while experiencing their sales process firsthand.

Not surprisingly, our efforts showed that service providers’ offers varied widely from simple, all-inclusive pricing (phones, CPE, service, usage, etc.) to very customizable, complex offers with a variety of recurring and non-recurring charges. To compare all offers on the same footing, GrowthMark developed a simple Total Cost of Ownership model that includes all recurring and non-recurring charges added up over the life of a three-year service contract. Our calculations included transport costs, feature charges, phones, CPE, and usage. To account for pricing variations by size of sale, we normalize the data and compare Total Cost of Ownership per user per month. The lowest cost offers

were around $50/user/month; the highest cost offers, over $140/user/month.

Sales processes were equally diverse. Some providers were able to provide quotes within a matter of hours after we spoke with a knowledgeable salesperson. Other providers required multiple phone calls and emails with sales and engineering teams before a quote could be generated. The worst providers left our mystery shoppers in a black hole with no communication for days, or sometimes weeks. We developed a scoring mechanism to account for both

quantitative and qualitative aspects of the sales process.

In general, CLECs fared the best, with prices lower than the group average and better, quicker, more engaging sales process. ILECs were the worst, by far with four ending up the in “high price/bad process” quadrant of the chart.

“I just can’t understand why it’s so hard to get straight answers from these guys [service providers]. Why can’t they help us figure out what we need?” - CFO, Topeka-based manufacturer

???

?$$$

Hosted

$$$

Premises

Sales processes were equally diverse. Some providers were able to provide quotes within a matter of hours after we spoke with a knowledgeable salesperson. Other providers required multiple phone calls and emails with sales and engineering teams before a quote could be generated. The worst providers left our mystery shoppers in a black hole with no communication for days, or sometimes weeks. We developed a scoring mechanism to account for both

quantitative and qualitative aspects of the sales process.

In general, CLECs fared the best, with prices lower than the group average and better, quicker, more engaging sales process. ILECs were the worst, by far with four ending up the in “high price/bad process” quadrant of the chart.

Sponsor’s Note: All data presented in this Research Brief is taken from market research conducted by GrowthMark in March and April of 2013. The research

was sponsored by Metaswitch Networks as part of MarketVisions, a marketing support program with a package of resources and services to support your

growth, including target market and competitive analysis, pricing and packaging support, brandable brochures, videos, and more.

For more info, visit: www.metaswitch.com/support/marketvisions.

conclusionsconclusionsWith relatively low adoption rates and aggressive plans to purchase, the SMB market

continues to present an important opportunity for North American service providers. They

can win their share of the market by presenting SMBs with offers that resonate with the

buying behaviors and purchase drives described in this report.

The correlation between adoption of IP Communications and Cloud Services strongly

suggests that service providers can capture a significant share of SMB spend on voice, Internet

and infrastructure by developing and selling a broad portfolio of voice and IT services tailored

to the needs of the market.

Finally, service providers need to improve their offers by making them simpler and more all

inclusive, and pricing in line with the competition. They would also do well to study their own

sales processes and streamline them to make it easier for SMBs to buy.