For Small Businesses, A Reprieve After Decades of Retreat

Share this:

FloristEarlier this week, the National Federation of Independent Business announced that its small business confidence index rose 1.8 points to 95.2 in April, the highest reading since October 2007. The indicator is a strong sign for the overall economy, but it’s particularly good news for the local marketing and technology industry — a large part of which relies on the success of small business across the U.S.

What’s less clear is whether the recent growth in local technology (what we define as tools that help business sell stuff in the real-world) will markedly improve the outlook for small businesses over the next decade. With small business week coming to a close, can we confidently say that small businesses are better off today than a decade ago? I say yes. Here’s why.

The last few decades have been tough for small business. But that’s changing.
For some context, let’s take a look at the numbers.

First, the overwhelming amount of businesses are small. In 2011, a little over 91% of businesses in the retail trade, which includes everything from gas stations to restaurants, employed fewer than 20 people, according to data provided by the Small Business Administration Office of Advocacy, a government agency which advocates on behalf of small business on Capitol Hill. That’s a point or two increase from 2006, but generally, the distribution has remained flat over the past decade.

However, small businesses’ share of employment has declined more markedly. The portion of employees working for retail businesses with under 500 employees has dropped 10% in the past eight years, declining from a little over 40% in 2006 to 36% in 2011. The decline, says Brian Headd, an economist at the SBA Office of Advocacy, demonstrates a wider shift in the retail trade, which has developed over the past few decades.

“One of the critical trends over the past twenty years has been the decreasing shares of small businesses,” Headd told me in an interview earlier this month. “It’s been slowly going on for a while. I would say that in looking at [the data] over the years, the businesses that start out bigger tend to last longer, whether that means they fared better is an open question.”

Headd admits that census data often offers a better picture of the past than it provides insight into the future. However, I believe a number of key technological shifts — namely, local information and cloud computing — will contribute to a marketable decline in the economies of scale that have contributed to the rise of the big box retail in the past three decades.

A revolution in data could reduce the value of one of the key advantages of scale — brand.
The concept of branding took shape in the post-war years, with television offering marketers a unique blend of creative license and national reach. Over the past few decades, “brand” strength emerged as a pillar of the increasingly strengthened economies of scale that helped big-box retail, large hospitality groups and a host of other companies grow to dominate their respective markets.

Traditionally, a strong brand did two things. First, it helped shape a consumer’s vision of the product. An effective brand shapes the socio-cultural implications of a given company. It creates a social identity which is inextricably linked to an organization, and consequently, the company’s customers.

But more importantly, a brand helps solve an information problem for consumers. A strong brand — let’s say Hilton — helps provide consumers with a clear set of expectations about the functionality and quality of a given product or service. We know, for instance, what to expect from a Hilton or McDonald’s. This reduces the risks the consumer faces in the decision-making process.

Today, the value of brand as a solution to an information problem is on the decline. The ability to access ubiquitous local information through a mobile device effectively disrupts the role of a strong brand in understanding anticipating the quality or functionality of a given product or services. Instead of relying on asymmetric information to make a decision (knowing more about one offering versus another,) consumers can turn to services like Yelp and Google to look at product information and reviews to make a more objective decision.

The democratization of enterprise tech
More recently, the introduction of cloud computing has reshaped another pillar of big business: enterprise technology. For instance, an April 2014 study by Sada Systems published by the Wall Street Journal found that the estimated cost of hosting a website with 50 million unique visitors (roughly the size of Upworthy) on Microsoft or Google’s cloud is roughly a third of what it costs a business to host it itself.

For larger businesses, the shift to cloud storage offers an incrementally faster and cheaper way of doing something they’ve done for years. But in the small business market, cloud computing introduces a deeper, more paradigmatic shift by democratising enterprise technology businesses — most notably, point-of-sale — which traditionally were relegated to sell to businesses with enough capital and reach to justify a big up-front investment.

In the point-of-sale sector, investors have already placed their bets, validating the thesis. Lightspeed, a Canadian startup raised $30 million from Accel partners in 2012; Revel Systems, another iPad-based POS firm raised $10 million last summer; and earlier this month, the New York-based Shopkeep raised $25 million to focus exclusively on the independent retail market.

For the most part, these startups share a similar strategy. They sell the software as a monthly fee, using commodity hardware (mostly, the iPad) and existing channels like Apple’s app store to reduce a number of the costs associated with the point-of-sale business.

The software-as-a-service model dramatically changes the economics of the product, amortizing the cost over the course of a year and effectively shifting the capital burden from the customer to the vendor. By running the application remotely (e.g. through the cloud), these companies dramatically reduce the installation and maintenance costs, which drive the majority of the revenue for legacy companies like Micros.

So, what does this mean for small business? Enterprise technology allows business to automate operations, creating efficiencies so a business can improve service and do more with less. More importantly, these systems will create a viable platform on top of which technology companies can overcome the implicit fragmentation of the small business market, creating a channel through which tech companies can efficiently build and sell products to small businesses.

At its best, the Internet allows for fragmentation to thrive. It allows the best product — whether that’s offered by a big brand or small merchant — to bubble to the top. As the digital and physical worlds collide, the economies of scale, which have fueled consolidation in offline industries for decades, will face a new, network driven logic in which any business is a hit away from overnight success.

Steven Jacobs is Street Fight’s deputy editor.