Monday, July 21, 2008

How big is the services market for Foundations?

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WHAT IS THE MINIMUM INVESTMENT IN LFS ?
Lets set a bottom line for a customer's investment in LFS. Deploying Foundations for a server and five users costs about $1,800 in Australia plus another $250 per additional user. Throw in a few days of consulting work spread out over the first month or two and let's decide that the customer is looking at a $5,000 investment. Of course, the customer may decide to do it all of the installing/configuring/tweaking work themselves in which case I'm happy to sell them the licences but then they drop off the radar for the purpose of this particular post.


WHO CAN AFFORD THAT INVESTMENT ?
Lets read what some experts say. The Australian Bureau of Statistics (ABS) defines a small business as one that employs less than 20 people. Australia has 1.88 million small businesses, which represents over 95% of all business. A good indicator of IT penetration in that market is the fact that approximately 80% of small businesses are connected to the Internet. Those Small Businesses generate around 30% of Australia’s economic activity and provide 3.6 million jobs, or 47% of private sector, non-agricultural employment. Australia has a population of just over 20 million and a GDP of $760 billion so readers in the USA could multiply the relevant numbers by 15 for population and 18 for GDP to get a rough approximation for their own country.


LET'S GROUP BUSINESSES BY TOTAL EMPLOYEES ...
My next source document is a presentation given by Professor Michael Schaper, Dean of Murdoch University Business School in Western Australia, on 20th February 2008. Professor Schaper used ABS stats to show the following breakdown of businesses in Australia. The number in [square brackets] is the corresponding figure for the USA.
  • Large firms: 200+ staff 5,876 ... (0.3%) ... [0.28%]
  • Mediumsized firms: 20-199 staff 78,304 ... (3.9%) ... [0.79%]
  • Small firms: 5-19 staff 228,313 ... (11.3%) ... [4.75%]
  • Micro-enterprises: 0-4 staff 1,699,277 ... (84.5%) ... [94.18%]
Over 50% of micro-enterprises in Australia employ no staff - they are a one (wo)man company selling insurance, washing dogs, making coffee on a street stall or whatever it is they do. The closest they get to information technology is running a spreadsheet on their laptop once a week to add up the takings. Not much opportunity for LFS there but that still leaves 306,617 Small and Medium firms plus the c.800,000 micro-enterprises that do have staff - that's over a million potential customers.


... THEN LET'S REGROUP THEM BY ANNUAL REVENUE ...
Professor Schaper also gives us the breakdown of annual turnover for Australian businesses:
  • $0 - $49,999 p.a. 501,467 ... (25%)
  • $50,000 - $199,000 p.a. 742,288 ... (37%)
  • $200,000 - $1.99 million p.a. 646,458 ... (32%)
  • $2 million or more 121,557 ... (6%)
The first group (<$50k) are the less successful micro-enterprises and are understandably more concerned with paying last weeks rent than with investing in new technology. Any of the second group (<$200k) who have employees are probably in a similar financial position and can't take their eyes off their cash flow for a minute for fear their business will collapse. It's only when we get into the third group (>200k) that there is a consistent opportunity to make a technology pitch. We are dealing with either a very successful individual or with a company that has employees and a reasonable cash flow. Just park that $200k number for a paragraph or two.


HOW BIG IS THEIR IT BUDGET ?
That question isn't as crass as it sounds. If a potential customer isn't able to allocate the money for the investment then there's no point in wasting their time helping them kick tyres. Far better to be upfront about the size of the ballpark and let them decide if they want to play. These figures show one survey of IT Budget as a percentage of Total Revenue for selected industry groups.
  • Education = 1.9%
  • Finance = 4.9%
  • Government = 9.7%
  • Health Care = 4.8%
  • Manufacturing = 3.3%
  • Retail/Wholesale = 2.4%
  • Services/Consulting = 4.5%
  • Telecommunications = 8.4%
  • Transportation = 3.8%
  • Utilities = 3.0%
Small business doesn't go into Government or Utilities which leaves us with an average of 4.5% across the remaining groups.

Multiplying that 4.5% allocated to IT by the $200k turnover mentioned earlier gives that customer an annual IT spend of $9,000 which means there's room for an investment in LFS.


SUMMARY
I'm comfortable in seeing the 646,458 businesses in Australia turning over $200,000 - $1.99 million p.a. as the primary market for LFS with additional customers in the $2m. plus group. Maybe half of these businesses can't see an immediate use for the technology (the local BBQ chicken shop, newsagent or florist springs to mind) but there will still be hundreds of thousands of businesses (such as real estate, car yards or financial consultants) who do want centralised file backup and email and possibly a web site.

That's over 300,000 potential customers for LFS in Australia.

Maybe I'd better hire more staff.


My figures here were sourced from the Internet on a lazy Sunday afternoon so I'm certain there's room for improvement. Feel free to tell me if you have better numbers.
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3 comments:

Ian Randall said...

Graham,

Don't forget the Third Sector in the market (NFP's). They are also a big market for Foundations.

The most current data on Not for Profit organisations in Australia shows that there are over 111,000 incorporated associations and over 600,000 unincorporated associations, of which 23,000 have full time staff.

Examples include numerous Health Funds, Community Organisations such as the House with No Steps (1,500 staff and volunteers) and the RSPCA and some very large church organisations.

Ian Randall said...

Some Stats from the July 2008 ARN Special Guide - Selling to SMB:

The rate of predicted growth (or lack of it) for hardware sales in the SMB market between 2007 and 2012 is 0.3%.

Software is expected to grow by 10.1%, Services are expected to register compound annual growth of 4.4%.

Small businesses with a headcount of 1-99) account for 26% of total business ICT spending. Medium sized businesses account for 18%.

IT services constitite 37% of IT spending (not including telecommunications) in the mid-market. By 2010 IDC predicts services will replace hardware as largest component of IT spending in this space.

In the small business space, 86% of IT spending went on hardware, software & services account for 7% each.

The percentage of Australian businesses with less than 500 employees is 99.8%. These are all considered SMB under IDC classification.

The number of medium businesses (100-499 employees) in Australia is 11,400.

The estimated number of small business operators operating across Australia (not including sole operators) is 829,300.

The spent on telecommunications in the small business space exceeds IT spending by A$1.4 billion to reach more than A$6.1 billion.

In Australia the ICT spending in the mid-market hit A$7.4 billion in 2007. In the next 5 years, software is predicted to have the biggest growth with a compound growth rate of 8.3%.

Graham Dodge said...

I'd guess the difference in our stats is because ABS defines 'Small' as one to twenty while ARN uses one to ninetynine. It's still a large number no matter which way you look at it.