Small Business in the USA – myths, and realities

Small Business is the biggest market in the US and this is the best place to start a company in

This is an oft-repeated quote in many pitch decks, sorry to inform you, dear reader, it depends. After spending a decade in the SMB space, I’ve learned a few things – what follows is an attempt to describe some myths and mistakes. Hopefully, you don’t fall into the same traps!

Myth #1: SMB market is huge in the US and is underserved. This represents a big opportunity

The huge number everybody trots out is ~30M small business in the USA, the engine of growth, big big market, main street America – AMURIKA YEAAAAAH. Alas in practical terms this is a long tail market. This data set from the SUSB is the best place to start. Just by looking at the distribution of firms by employee size it is clear that this is a long tail market. There are a large number of firms that are <10 employees.

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Source: SUSB data

This market is highly fragmented and very very hard to consolidate. Building a product that satisfies large swathes of the customer base and then acquiring them cost-efficiently is HARD!

Myth # 2: Small business is the engine of the economy and they are pre-disposed to want to grow. This market will continue to grow and selling into it is easy.

There is a very important nuance here – yes the absolute number of small businesses may have a strong growth rate but if most of these small business owners are not in the business of small businesses to grow. Let me unpack that a bit. The large majority of folks who get into starting their own business are motivated primarily by wanting to work for themselves and having schedule flexibility. They are not obsessed about growing their business and getting $rich. They want to just get by and maintain a standard of living – growth is not the main driver. Thus this SMB market being an easy sell-into is a myth, it’s hard to sell to anything to a business owner who does not fundamentally want to grow. They are incredibly resistant to changing the status quo.

Myth # 3: There is an inbuilt network effect with this market. SMB’s have the same needs, we can build a community/marketplace around them

This idea takes various iterations. The common ones that I’ve encountered

  1. Let’s build a community site where SMB’s can share their learnings and help each other.
  2. Let’s build a marketplace where SMB’s can transact with each other and help each other out. Imagine a world where one SMB needs a printer and another sells Printers, they can connect and give each other discounts.

Spending over a decade talking to SMB’s has given me this one insight – they are extremely private and do not want to share any info with anybody. Their mindset is that everybody is a competitor and everything that they do is a stealable secret sauce. Without a natural affordance/incentive to share – its hard to get these community ideas off the ground and achieve any scale.

Myth # 4: A delightful experience will be the differentiator

This is the product CEO driven myth. Yes, a seamless product experience is important, but this is not the differentiator. The average age of the customer in this target market skews older, so you have to keep that in mind. This customer set is not going to have the affordances for the cool new UX paradigm that you saw in a hip consumer product. The customer is still a bit old school and delightful for them is still functional first. In a broad sense – good customer experience is table stakes now – it is no longer the differentiator. Price is still the number #1 factor.

A corollary worth exploring here is – speed. The common pitch for most financial services companies targetting SMB’s is that we can offer them X products faster than the incumbents. This is partially true if the speed is 10X faster than an incumbent – but is not the differentiator. Small Business Owners will not pay an exorbitant differential for speed – the base price is still the overwhelming factor. So to compete – you have to be better, faster AND cheaper. Then the question becomes – what edge to you have in a commodity business? (Cheaper always finally leads to commoditization)

What other lessons have you learned about building products for this market? Comment away!

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