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Analyst Highlights Where SMB-Focused Solution Providers Are Making Money Today

The SMB market remains highly fragmented across business types, but it's clear software purchases are rising as more applications become available to small businesses, an NPD Group analyst tells attendees at the NexGen Conference.

Small businesses present a highly fragmented market for the IT channel, complicating the efforts of solution providers to target the many opportunities that abound, according to Michael Diamond, an industry analyst with The NPD Group.

Solution providers that have succeeded in driving SMB practices typically deliver the latest cloud technologies geared to save costs to customers in specific verticals, Diamond said Monday at the NexGen Conference hosted by The Channel Company.

The data collected by his firm shows software is still a much smaller component of overall spending in the SMB market—26 percent compared with 74 percent for hardware. But software sales are growing at 14 percent, much faster than the 8 percent rate of hardware growth so far in 2018.

[Related: MSPs Must Prepare For These Three Most-Disruptive Technologies]

And the key areas of growth the channel should focus on involve some of the most prominent emerging technologies—starting with software-defined data centers and hybrid cloud,

Another important area identified by NPD is analytics, business intelligence and visualization.

"Everything is becoming quantified," Diamond told NexGen attendees. "That has major implications for you as we're capturing all this data."

Edge computing and omnipresent security are another large driver of growth for the channel.

Despite some predictions of doom and gloom, the IT channel is doing well as an overall business—NPD data shows growth in 2017 higher than 4 percent, twice as fast as the overall national GDP.

Cloud sales through the channel are growing near the 9 percent mark, Diamond said.

The small-business market is challenging to evaluate in comprehensive terms, as it remains highly fragmented across business types. But it's clear software purchases are rising as more applications become available to small businesses, Diamond said.

"The application is essentially the Trojan horse into that office," Diamond told solution providers. And cloud is the beachhead into places like retail outlets, law offices and doctor's offices, he added.

The channel can capitalize on selling services if solution providers focus on "where they can make a compelling case of helping companies prune costs," Diamond said. "Those are the guys making inroads in the market."

Reducing IT staff by centralizing data centers, or offering managed print services, are the type of solutions that deliver savings to customers and revenue to partners.

For business under 500 seats, retail, health care, hospitality and construction "are pretty gargantuan pieces of that market," he said. "And that's really where the channel is growing."

Major vendors like Amazon Web Services and Microsoft are looking to hone in on those unique verticals, developing "departmental applications" and "locking in department after department."

Greg Portis, product manager for cloud solutions at systems integration giant CDW, said one statistic from Diamond that stood out in his mind as he watched the presentation was that nearly three-quarters of sales to the SMB market are still hardware.

But "small-business growth is still hard to quantify," Portis said. "Everybody has an anecdote, but nobody has the data."

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