The Problem

To say that small businesses are largely ignored by US carriers is putting the best possible face on a sad situation. In spite of their obvious position in the carriers' constellation, the marketing efforts geared to the residential and small business customers are primitive. Local telcos address residential customers primarily with bill stuffers supplemented by frequent telemarketing programs; and while small business customers get a significant amount of brochureware, most of it focuses on the uses of existing added value features which are available on the network.

The long distance vendors have been much more aggressive in marketing their services into these segments, but the focus until recently has been almost exclusively on discount pricing. Each of the major interexchange carriers (IXCs) has dozens of promotions in effect at any time. These promotions invariably take the form of discounts or installation charge waivers based on usage volume, term of commitment, or both.

With competition between and among the IXCs and RBOCs forcing carriers to re-examine their entire marketing operations, the time is at hand to wrestle with the unmet market needs of the residential and small business segments. Bundling is not all that is required to excel; simply dressing up commodity services in a glossy marketing brochure, creating integrated billing platforms, and throwing it over the wall to the small business just will not cut it.

To really understand and win the loyalty of these customers (and yes, it is possible to use this word in the context of small business market), the carrier must undertake a review at a fundamental level of what each segment truly needs. Our appendices present such a fundamental review; they are based upon an ongoing series of in-depth interviews with a panel of over 200 small businesses. Almost 1,000 interviews have been conducted with these firms over the course of several years. The panel currently includes 231 small businesses representing a broad cross section of industries. Each of the 231 panel members has been interviewed at least once within the past two years, and 97 of them have been re-interviewed during 1996. To those who would argue that the discussions in the Appendices are at too basic to be included here, we respond that ignoring fundamentals while a market is in transition is to court disaster.

Experience with other markets does not readily translate to the small business market. One of the problems Insight has observed in the telecom industry's efforts to market to small business is the attempt to apply experience gained from other markets. The diversity of small businesses and their varied requirements do not lend themselves easily to such an extrapolation. Small businesses are neither miniature big businesses nor part of the mass market. Conventional telecom industry wisdom would have them be one or the other, or perhaps both simultaneously. The small business market requires a different view.

The Market

This report examined the market for telecommunications products and services within the residential and small business market segments. Small businesses are defined as firms with 100 or fewer employees. In this study a distinction was made between small businesses with employees and the growing number of small businesses without employees. These employee-less businesses are run by solo entrepreneurs.

The small business market is seen as being made up of the three segments:

• Residential households,
• Small businesses with employees, and
• Small businesses without employees.

Telecommuting is not addressed here because it is an element of large business. Work brought home is addressed only indirectly insofar as it has an impact on residential communications. Small businesses operating from home are discussed.

Insight's thesis is that the growth of these markets is occurring despite the marketing efforts of the telcos, whose efforts by and large have been mostly ineffective or nonexistent. The only area where marketing efforts have shown an impact is in the many discount plans of the long distance carriers. In the local telcos, cellular telephone service and residential second lines are the two categories which have shown the most growth. The growth in second lines is attributable to the demand for home business applications rather than to telco marketing efforts.

We believe that the market can be grown at faster rates than forecast in our study. Customer demand will continue to drive the major elements of the market. All of our research shows that small businesses are willing to pay for improved service features if they perceive a significant business value.

Continuing efforts by equipment vendors and vendors of information services will create significant growth for some products and service sectors, though voice network enabled applications have the biggest potential for growth in absolute dollars. In this area a combination of telco marketing deficiencies and network complexity are serious constraints to further growth.

Insight's analysis suggests that small businesses without employees are becoming a major component of the small business market, and they have increasingly unique telecom requirements. These smallest of all businesses will increase in number to over 17 million firms by 2001. They will also become significant users of advanced telecom products and services. Solo firms--historically dominated by occupations, such as barbershops, writers, and plumbers--are now becoming the preferred method of operation for high tech occupations, such as programmers and consultants. These new solo practitioners are heavy users of advanced telecom tools, including cellular, PCs, and data communications.

The Opportunities

Small businesses increasingly rely on telecommunications to:

• receive sales orders from their consumer customers,
• provide customer support after the sale, and
• send purchase orders to their suppliers.

The smaller the business, the greater the need for enhanced functions. One and two person organizations (of which there is a rapidly growing number) have especially critical needs, and though it may sound trite, the primary telecommunications medium in small business remains the telephone. Voice telephone calls are still the only significant telecommunications link between small businesses and their customers. Even the new solo entrepreneurs who make extensive use of data links, fax, e-mail, and Internet databases handle more messages using the voice telephone than through all of these other media. For many of these high tech firms, the data communications online time is often two to three times higher than the voice time. Nevertheless, the number of messages handled by telephone daily is more than the number handled any other way.

While data communication is still in its infancy in the small business market, most small businesses already have PCs and are expecting significantly more utility from these units. The movement of information between small businesses and their suppliers is becoming increasingly automated and is an important driver of non-voice communications in this segment. In the residential market, the growth of data communications is usually related to student access to the Internet and other online information services.

Insight's research suggests most of the information movement in both the residential and small business markets continues to be intraLATA. Most small businesses operate over relatively small geographic areas; sometimes this area is as small as a neighborhood (retailers), it is rarely as large as a state (trucking companies). For this reason, few of small businesses telecommunications requirements extend over wider areas; the vast majority of their calls remain within the LATA. As the character of very small business changes and high tech employees become solo entrepreneurs, the growth of interLATA traffic will increase, but very slowly. The long distance traffic generated by residential users is also growing.

We believe the key business opportunity in all of these markets is solution packages which integrate sets of products, services, software, support, and a market delivery mechanism. These packages must provide customers with recognizable solutions to identified information movement problems. Such solution packages can be as simple as combining a caller ID service with a display package; some of the local telcos are starting to offer such packages through telemarketing and trial installation promotions. Other solution packages could be more complex, such as the incoming call management system. Simple or complex, the solution packages must relate to a need which the customer can recognize, and they must also present a complete solution from a single source, preferably on a single bill.

Properly segmented, small customer groups have very similar telecom problems. Solutions can be designed and pre-packaged for groups of customers. Pre-packaging not only provides a more than adequate solution to the customer at a manageable cost to the vendor; it also focuses the vendor's marketing efforts very efficiently, and creates a mechanism for partnering with other complementary vendors. Computer value-added resellers (VARs), for example, tend to specialize in specific industries, such as wholesaling, construction, and trucking. Because of their knowledge and familiarity with the needs of small businesses in these industries, they can address the specific needs of that segment.

The complexity of the information world is overwhelming small business customers, yet the marketing of telecommunications products and especially services to small customers has been almost nonexistent. The institutional advertising and product capability brochures which have addressed these markets are not effective marketing. Price promotions have long since passed the point of diminishing returns. Insight's analysis suggests that before carriers can truly excel in the new marketplace, a fundamental re-examination of the requirements of the small business and residential segments must be undertaken. To those that would argue "we know our customers," we respond that ignoring fundamentals while a market is in transition is indeed a recipe for disaster.

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