As IPOs Near, Tech Takes Another Crack at Small Business

The technology industry has succeeded in many of its recent endeavors. It’s devoured conglomerates and upended industries. But it’s largely fallen flat when when trying to serve small businesses.

However, the small business technology sector sits on the brink of an exceptional period of growth. Yodle and GoDaddy remain quiet in the run-up to their respective IPOs, Square pads its pockets with more capital, and legacy media continues to search for a way out of a hemorrhaging content business.

The influx of capital will undoubtedly accelerate innovation in the industry. But new products will only create momentary separation. The more fundamental question is how these companies slow an already rapid rate of commoditization within small business marketing sector, and “build a moat” around their businesses to hold back the next wave of startups looking to grab market share in their wake

Over the next month, Street Fight will speak with some of the brightest minds in the small business marketing industry as well as a number of entrepreneurs looking to find a better way to solve the problems of mom-and-pop shops. In a series of features, we will also outline a new strategy around which these companies can start to build the necessary barriers of entry in order to ensure recurring revenues and build defensible, lasting businesses.

The business network and the dentist software parable
Earlier this summer, Fred Wilson, the outspoken founding partner at Union Square Ventures, penned a post that laid out a common course for many software-as-a-service businesses. After early growth, he argued, competition leads to replication, commoditization and an eventual corruption of the core business model. The parable offers an important lesson for a local marketing sector that increasingly is shifting from resellers to a SaaS model capable of aggregating the various needs of a small business into a single product.

Wilson’s story was meant to underscore a more basic belief about the web: that in a digital marketplace, networks — and not much else — last. The sustained success of Facebook and the subsequent failure of competing social networks such as Path underscore the extraordinary value that a robust network provides. In order to ensure long-term success, local marketing firms need to do the same.

The larger stakeholders in the local marketing industry effectively own two valuable networks that the smaller competitors do not: a pool of products and a larger customer base. We believe that the eventual success or failure of these firms will depend on their ability to build products that strengthen each of these networks. These “network products” that use the lot to help the little — like benchmarking, marketing automation, and yield management — will become an important part of these businesses, creating assets that only improve as the operator gets larger.

Bringing automation to local marketing
A year ago, we published a report detailing the coming impact of automation in the local marketing community. The thesis outlined the growing importance of back-office systems — payments, point-of-sale and other operations tools — in driving innovation in marketing software for small business.

The thinking centered around the networking — or integration — of various products. The schedule informs the email blasts; loyalty programs tie in with the Facebook campaigns; payment data informs the search and display spending. The data generated from one product drives the decisions of another. And it does so with little to no human input.

We believe that automation — a feature enabled by the networking of various products — will provide a point of differentiation for larger firms over the next 12-18 months. Automation will help not only create a better product for business; it will allow providers to integrate more complex capabilities and tactics that were only available to larger firms ( e.g. yield management.)

The concept of marketing automation is not new, of course. Companies such as Marketo, Pardot and many others have developed automation products for larger brands for years.  Traditionally, the small business market lacked the necessary scale to justify the spending needed to create software that could transcend the extraordinarily fragmented landscape of operations and marketing software products. The economics simply did not work.

That’s starting to change. The introduction of cloud-based operations software helps to centralize the massive amounts of operations data flowing from small businesses every day, making the task of building automation software, which relies on those data, far easier than before. And as the local marketing industry consolidates it will become only easier for these companies to integrate the various parts of a merchants business into a single, interoperable system.

For the small business market, the impact of automation goes beyond efficiency and optimization. Without the layer of agencies to help navigate the market, small businesses have been unable to cash in on some of the more complex innovations. Automation should help reduce the cost of implementation for businesses, and in turn help open the market for tech companies.

A network of customers
For small business owners, the benefits of the cloud computing revolution have largely come in the form of a smaller price tag. But price is only the beginning in what will be a much more important shift in the way small businesses share data and leverage one another to create a distributed network that more effectively competes with more traditional corporate structures.

There’s an opportunity for technology companies to use their install bases to help small businesses to share a range of resources more efficiently, replicating the economies of efficiencies of a larger organization without sacrificing the creativity, responsiveness, and flexibility of a network.

These innovations are a bit farther out. Today, we’re seeing a handful of point-of-sale and CRM companies creating industry benchmarks, and a number of marketing firms use aggregate data from search campaigns to help improve targeting and buying algorithms. But this could eventually expand into shared profiles for consumers, or even, creating a loyalty network which can share data from business to business.

Throughout September, Street Fight will take a deep dive into the challenges facing the small business technology market, detailing the dynamics and key companies that will help to build the future of the industry.

Steven Jacobs is Street Fight’s deputy editor.