What is the Middle Market, and Why Does it Matter?

Over the years, I’ve spent many hours talking with B2B software companies about the customer segments they target: small businesses, mid-market companies, or large enterprises. Or, as some would put it, are you hunting mice, deer, or elephants? That question quickly turns into a confusing debate over how to define each segment—an essential step in calculating TAM.

Defining the Middle Market

There are no standard definitions for these customer segments, and that is especially true in the middle market. A vendor coming downmarket from the enterprise (for example, SAP) will define the middle market and SMB to include much larger companies than a vendor moving upmarket from the low end (for example, Intuit).

To make matters worse, vendors use different metrics to define these segments. If your company sells payroll or HR software, you’ll typically segment by employee count. If you sell payments, banking, AR, AP, or procurement software, you will more likely define the segments by company revenue. Unfortunately, headcount and revenue correlate poorly across industries, with roughly a 10x spread of revenue per employee between labor-intensive and capital-intensive businesses. In short, it’s messy.

Still, it’s instructive to look at how large public companies that serve several of these segments define the market. Below is a chart with the definitions I found from companies willing to put their own markers down:

As you can see above, most B2B software companies define small businesses as those with $5–10 million in revenue, though Intuit stops at $2.5 million, while banks and SPS Commerce extend the segment to much larger companies.

Definitions of the mid-market range from $2.5 million at the low end (Intuit) to $2 billion at the high end (Wells Fargo), which is an outlier. There’s no consensus, but the more reasonable range is $20 million to $500 million, or perhaps $1 billion.

My Definition of the Market Segments

For illustrative purposes, I chose definitions as follows:

• Small is less than $10 million in revenue.
• Mid-market is $10 million to $500 million.
• Enterprise is $500 million+.

You can compare these definitions to census figures to estimate how many mice, deer, or elephants you’re hunting. As you can see at the bottom of the chart, there are approximately 15.6 million companies with less than $10 million in revenue (blending employer and non-employer businesses, 200,000 in the mid-market as I’ve defined it, and 9,200 enterprises. Even these numbers are debatable at the low end, but my numbers roughly comport with those I found here.

Why Does the Middle Market Matter?

Okay, we have defined it now, but why does the middle market matter? What makes it important and different? A few things:

• It’s a large market. With 200,000 target companies, vendors get plenty of at-bats. Combine the number of companies with typical mid-market ARRs (a topic for another post, but $15k to $100k), and the TAM is substantial.
• The mid-market has a much more fragmented ERP base than the other two segments.  Intuit QuickBooks dominates the low-end small-business market, while many vertical ISVs dominate in SMB-heavy industries. The enterprise market has SAP and Oracle at the high end, but the mid-market has NetSuite, Sage Intacct, Microsoft Dynamics, and a range of vertical players. They are large, but not large enough to suck the oxygen out of the market.
• As a result of the above, along with the slower transition to the cloud, the mid-market remains greenfield for many vendors. Ramp and Brex are fast-growing and headed upmarket. AP, card, procurement, and AR vendors often find the enterprise market saturated and the mid-market more vibrant. For these vendors, there also simply may not be enough spend in the SMB market.
• AI is creating mid-market companies in months, so the segment is growing (as is the SMB segment)!
• In the procurement world, small companies are price takers. Suppliers tend to dictate the terms, purchasing process, and payment terms. In the enterprise, the buyer calls the shots. In the mid-market, it varies widely, depending on the industry and spend profile.
• Mid-market companies share many of the same complexities as large companies: they can be multi-jurisdictional, multi-entity, multi-bank, multi-currency, and subject to complex regulatory or customer requirements. But they often lack the IT, procurement, supply chain, treasury, and security resources of larger enterprises. They tend to need solutions, rather than tools—and they need them to work quickly.

It’s Okay to Be Stuck in the Middle

Before I came to the world of B2B software, I worked in consumer products, a world where companies avoided the middle at all costs. Michael Porter famously taught us that you had to pursue cost leadership, differentiation, or a niche focus to avoid being “stuck in the middle”.

I started my career in software with a bias to avoid selling to middle-market companies. In my mind, they always offered much lower ARR contracts than enterprise customers,  but had much longer sales cycles than small businesses. This seemed like a bad trade-off and a good case of being “stuck in the middle”. Of course, HubSpot, NetSuite, Acumatica, AvidXchange, and others have taught me that with the right product and the right distribution mechanism, you can be very successful by being stuck in the middle.