NetSuite and ERP for SMB/SME

Implications: NetSuite is in a market where gaining and keeping customers is expensive, and likely to become more so as the competition intensifies.  While NetSuite has shown good growth, and the market is big enough them to grow further, profitable growth will be a considerable challenge.

Analysis: NetSuite is in a market segment targeted by SAP from above, Microsoft from the side and Intuit from below.  The large enterprise ERP market is mature.  Future sales are going to happen as enterprises add new functionality and upgrade existing software, but the days of attractive growth for the ERP vendors is past.  The very small business market is dominated by Intuit.  That leaves the “in-between” market, represented by businesses growing too large for QuickBooks, but perhaps not yet ready for SAP.  This is NetSuite’s primary target market.

Unfortunately for NetSuite, the other vendors are also beginning to target that market.  SAP in particular is aiming directly at that market segment with their Business ByDesign (BBD).  BBD is also offered as a hosted solution, but with a clear upward growth path which NetSuite cannot offer.   However much NetSuite may talk about scalability, they cannot match SAP’s track record for providing ERP software to the world’s largest enterprises.  SAP’s biggest problem is one of marketing:  Can they convince smaller businesses that BBD really is affordable for them?  Given SAP’s reputation of big and expensive, most smaller businesses will not even consider them.  NetSuite can use that as a strong competitive weapon when selling against SAP.  Nonetheless, SAP is a formidable competitor and should not be underestimated.

Microsoft already has a strong presence in the SMB/SME market.  While Microsoft may not be widely known for ERP software in the SMB/SME market, their reputation will usually be enough to get them in the door.  Once there they can sell based on the argument that their software leverages the common interfaces already known through Office and Outlook, and thus requires less of a learning curve.  Whether true or not, it makes a strong sales pitch, especially now that Microsoft also offers a hosted solution.

Many of the small businesses NetSuite is targeting are already running QuickBooks and are outgrowing it.  QuickBooks Enterprise, while not widely known, provides the simplest and cheapest upgrade path for that market.  Intuit, which has arguably saturated the really small business market, is now focused on moving upmarket.  Their user interface is very simple, their reputation among small businesses is generally excellent, and they just need to convince potential customers that they can scale to fit the requirements.  Their strengths and weaknesses are the exact opposite of SAP’s.

NetSuite is already spending a large amount to acquire and retain customers.  They need to improve the metrics in this area if they are to become profitable.  Yet most of their corporate life has been spent in an environment where competition from SAP, Microsoft and Intuit was minimal.  Since those companies are now targeting NetSuite’s chosen market, it is difficult to see how NetSuite can make significant improvements in their expense structure.  NetSuite’s IPO gained them considerable publicity, which will help with customer acquisition and retention, but the increased competition should more than offset those gains.  NetSuite’s current market cap reflects expectations that will be difficult for them to meet.