“There has been an awakening. Have you felt it?” says Supreme Leader Snoke in “Star Wars Episode VII The Force Awakens”. He was referring to something entirely different from what I’m getting at, but there is some kind of change going on in the business world. It’s more than a trend or fad. The fact is that all things “small” are not just “cool”, but actually in high demand and perceived to be of higher value than “big”. This is not exactly breaking news though. We’ve seen small scale burger production from Shake Shack do things for fast food that McDonald’s and Burger King simply can’t adapt to. Not an hour of the day goes by when someone doesn’t come up with another take on Uber and its disruptive effect on the market for everything from taxis to messenger services – a concept that is built entirely on the fragmented and somewhat diminutive (pardon the pun) chassis of good old fashioned cab drivers. For 36 years Tom’s of Maine was a small stand alone brand that fought major consumer goods conglomerates until it was finally bought by Colgate-Palmolive in 2006 (more on that in a future post) & more recently another TOM(S) has emerged as a small “do-gooder” brand that is scaling up its fashion business by selling comfortable shoes and simultaneously donating pairs to children in need. AirBnB is rocking the hotel industry by parlaying small, fragmented accommodations into what will amount to the world’s largest hotel business. And there are a lot more examples popping up by the hour. There are 2 things about this trend that I find really interesting:
- Unlike the old days when a company like Ben & Jerry’s was more of an anomaly or a fluke, today a clear cut market preference has emerged to do things the “small way” or in “artisanal” fashion without accepting the trade offs that can come from limited infrastructure.
- The power of small business (or even the “soloprenuer”) is being harnessed in an unprecedented fashion to achieve what used to require large scale capital expenditure and investment.
So about this catalyst – well, we know what it is: technology. More specifically, it’s the internet and if you wanted to rephrase things a little bit you could attribute the phenomenon to widespread, inexpensive communication. But here’s the thing – technology is doing what it’s always done. Combustion engines, automatic transmissions, digital calculators, commercial aircraft and other such inventions deemed “routine” today were the leading edge high tech inventions of their time. That is, technology is enabling better, faster, higher productivity at a continuously decreasing cost.
The other phenomenon, and the one that I really am intrigued & impressed by is the rise of small business enabled by the internet and how this preference is almost inherent to the human condition or the business condition. It’s almost as if the whole world was waiting for the chance to root for small business or work with small business or incorporate small business into their supply chains and that moment appears to have arrived.
What’s behind this rise in small business interest? Are we at heart a society of secret owner operators? Is there some greater myth that inspires us? Or do we believe that small businesses somehow “do it better”?
The answer may just be: all of the above. But more realistically, I think it boils down to service and process. That sounds incredibly unexciting doesn’t it? I am a huge believer in the power of myth and its connection to all things in the world (including data, revenue, business cycles, and other “quant” stuff) so I’d like to tell you that our fascination with small business lies in some myth centered around a Skywalker-esque hero perhaps. However, the reality is that small businesses just “get” service better than anyone. So, why not break up every conglomerate or large business and offer the world a “service utopia”? Well, here’s the catch with service: it’s not easily scaleable. You can empower managers to make decisions, reward employees for great customer service, and give training seminars all day long, but you cannot truly scale service. Here’s the paradox then – if a large business runs itself like a small business, it will collapse under the weight of it’s own transaction volume. This is frequently referred to as micro-managing. Meanwhile, if a small business tries to run itself like a bigger business it will either collapse under the weight of the overhead that such a structure requires, or, more likely (and especially relevant for the purposes of this blog post), it would never be able to satisfy any of its customers in terms of price or service offerings.
Fortunately, there is a middle ground. There is a magical intersection of the scale curve and the service curve that can yield a superior customer service experience which doesn’t force customers to overpay nor sacrifice quality in favor of price. It’s a relatively new dynamic and one that is going to proliferate over the years to come and it is a direct result of internet technology being applied to business processes coupled with the desire to be small and focused. I like to think of it as the rise of the business platform.
Platforms, hamburgers & scale
To understand platforms and what they can do for the B2B and B2C markets in the future, let’s look back at the age old concept of franchising. There’s no need to repeat the whole Ray Kroc and McDonald’s story, instead just ask yourself this: “when was the last time I saw a chef at McDonald’s?”. All those billions of burgers sold every year, and no chef in site!? The reason is that McDonald’s has built the franchise concept to perfection and made it into a small business platform. Each burger is pre-made to a precise size. Each french fry is cut to a precise width. The fryer that cooks them chimes when the fries are done and even builds in time to account for the delay between its chiming and the time the attendant actually pulls the fries out of the oil, etc. All of this is done for one reason: to give customers one great, standardized product over and over again. That’s the kind of undertaking a big business with ample resources is uniquely equipped to deliver. But who makes it work? For all of the R&D that goes on at McDonald’s headquarters, and for all the billions that the parent company spends on marketing, advertising, corporate structure, etc. the fact remains that it’s the franchisees who make the stores work on a daily basis. They are the ones who face the customers, ensure the lights are on, the floors are cleaned and make sure that the front facing, retail end of the experience is so good that customers will want to come back over and over again. Can McDonald’s survive without its franchisees? Absolutely not. But, let’s think about how many franchisees earn their livings or have amassed considerable wealth thanks to McDonald’s. Could they have done it without McDonald’s by building burger outlets of their own? Maybe a handful would have succeeded over time, but the vast majority would never even successfully run one store without the support of the McDonald’s platform.
Now this is where things start to get interesting. In theory, we should all just save money or maybe get a loan from a franchise finance company and open up a McDonald’s or Wendy’s or Subway, and start our entrepreneurial journey this way. The ambitious ones can scale up to multiple outlets and those who want to use it as a “lifestyle business” (a term I don’t especially like, but it does fit here) can simply own one or two, pay off the bank, make a good salary and exit the business when the time comes to retire. But that’s not feasible. The list of reasons is long, but let’s just accept the fact that not all of us want to own a franchise restaurant for a career or even as an investment. So, what do we do? Well, that’s a conversation for some other time, but let’s speed things along and say you’ve decided to start a business that isn’t a franchise, and that you’re using your own money for now (with some plans to raise money in the future perhaps) and so conserving capital is key for you, but at the same time you need to access opportunities and infrastructure that you don’t necessarily have the money for. Here’s a look at your “McDonald’s” – the platform that now enables small businesses to compete against the big ones and deliver the service day in & day out.
Technology has flipped the dynamics of customer aggregation. Time was, a business needed to build the revenue to drive the profits which were then reinvested into infrastructure to support more customers, who would then provide more revenue to drive more profits to build more….etc. and so went the cycle. Now, thanks to technology the equation looks considerably different: the moment a small business goes live with their website they effectively become global. Think about that: the neighborhood exterminator’s website can be accessed by a web user in Singapore, Moscow or any other location on earth. So now you have an audience, or at least access to an audience. If you used a service like Wix or WordPress you actually established this web presence for free or for no more than the cost of buying a domain ($2.99 in some cases on GoDaddy). (It actually cost me $60,000 to launch one of the first freight e-commerce websites in the industry back in 2001. Wish I had my money back!).
Now that your small business has an audience, you need to have a way to be contacted. You might start with free contact tools like email, but let’s say you still want a phone number and phone system (startup founders may roll their eyes at this, but trust me, a lot of small businesses – including ones looking to scale – still need phones and phone systems) you could opt for any number of VoIP systems. These are great tools, and I personally had such a system from Broadview Networks that literally saved my business in the aftermath of Hurricane Sandy in October 2012. So now, for no money upfront, and a very low monthly cost, you could have a communications platform in place that rivals what your larger Fortune 500 competitor has. Pretty cool!
With a web presence and the infrastructure to actually talk to clients in place, you’re ready to put these tools to use. Somewhere above, I neglected to mention that you’ll need high speed internet, but if you’re home based you already have this and if you have an office or store you can get it for $85 per month or less. And if you’re neither (i.e. you work off a WiFi connection at the nearby Starbucks) there are still a lot of free or low cost options available to you.
So now you’re online and reachable by phone or email. Let’s get some traffic coming to that website. The easiest place to begin, for free, is with social media. Yes, these are platforms. How you choose to use them is up to you but for business purposes you can use LinkedIn, Facebook or YouTube (amongst many, many other options) to get the word out about your business. Launch a series of YouTube videos on how to tie a bow tie (because you sell the widest selection of bow ties in the tri-state area). Create a LinkedIn group on the value of ongoing truck maintenance. Create Instagram and Pinterest pages/boards to promote your line of coffee mugs. In the old days, small business owners like me would spend $300 or more per year on a listing in the Yellow Pages. That was small business marketing and all it got you was exposure to people in your zip code or county. For far less money, in fact often for no money at all, social media gets your marketing message out to a limitless audience. Once again, behold the power of the platform. You used to need Procter & Gamble money to reach a global audience. Now you don’t. Even better, P&G knows it and they feel you coming.
Infrastructure secured, marketing messaging en route to the world, you’re off to a good start and you haven’t had to flip a single burger. So far you are feeling good about not becoming a McDonald’s franchisee. The marketing channel is clicking. Phone calls are routing from your desk to your cell phone thanks to your VoIP system and now you find that you need a little support. Maybe you want someone to update the social media channels while you fill orders. Or perhaps you’re not filing all of your receipts or updating the checkbook on time. You can only dream of your first full time hire, but in the mean time there is help. Virtual Assistants, popularized by Tim Ferriss in his book “The 4-Hour Workweek” have become crucial providers of support for startups in recent years. VA’s (as they are often known) can work on almost any task, can cost as little as $10 per hour, work remotely (no office space required), work offshore (24 hour work potential), and sit on somebody else’s books (no unemployment withholdings, payroll taxes or medical insurance costs to drive overhead). Strictly speaking, VA’s are just service businesses rather than platforms, but consider how you got your VA! Sites like Upwork or Fiverr deliver customers, billing and payment solutions to a global army of assistants, contractors, designers, consultants, etc. That’s a platform at work for sole operators, freelancers and small businesses.
Manufacturers and distributors drop ship, courier companies like UPS take care of deliveries and any number of freemium or low cost software packages such as Marketo and QuickBooks allow you to keep track of it all. Just like that, you now have a fulfillment function and a list of vendors to support your business. The freemium, SaaS and contract service providers are key here. You can access their services for free, and only as needed. That’s almost like a credit line: do business now, pay later and that too for only the business you actually secure. People who launched businesses as recently as 2000 have to be jealous.
Now maybe you’re ready to spend some real money. Remember how we boiled the cycle down to revenues to profits to reinvestment in order to get more revenues? Perhaps now maybe you’re ready to reinvest in advertising or infrastructure. For the moment let’s look at advertising.
The theme here is platforms, remember. McDonald’s takes a cut of franchisee revenues for advertising expenses but theirs is a closed system: the only beneficiary of their ad platform is themselves and their franchisees – so while they take a big cut, they deliver value exclusively to their business. You and I don’t have that luxury, but thankfully we have access to a vastly larger platform for delivering advertising. The grand daddy of that space is Google and their incredible Adwords platform. Yes, it is a platform. Google gives you the tools to find keywords relevant to your business. They give you analytics to see the real time results of your advertising spend, they disseminate those ads across several internet properties, etc. The famous retailer Marshall Field mused about not knowing which 50% of his advertising budget was wasted. Thanks to Google, we actually know what’s working and what’s not, without any wastage at all. They even give you free Adwords vouchers so that you can get $150 of free advertising on their platform. Similar paid advertising platforms exist on Bing, Yahoo, Facebook and LinkedIn amongst others.
So where do you suppose this is all headed? We know about barriers to entry and that as they get lower, more participants get in on the action and drive down the value of the business opportunity until it becomes commoditized, at which point consolidation happens. Well, in some ways the commoditization of platforms is happening already. Adwords are not expensive, but the conversion rates are low relative to other forms of marketing. AliBaba storefronts are generally discounted to 10% of list price (whether this is a marketing tactic or not, the fact that you can be on a massive platform for less than $500 per year is really cheap). Facebook ads were cheap, now they’re not, but someday they will be again. The same is true for LinkedIn and other platforms, all of which are economical and allow you to set a spending limit so that you’re never “burning” advertising dollars.
Now if we’re reaching a point of commoditization, then I believe the future belongs to value added platforms and niche platforms. You see, digital business is still…business. While there may be disruption and a re-ordering of hierarchies, some of it is going to feel a bit like shuffling deck chairs on the Titanic. Brick and mortar trends will simply turn into digital trends. So, as platforms grow and become the norm, the winning platforms will be those who find ways to do more than drive down price. The winners in the world of digital business will be the ones who help add value to the businesses of their customers by increasing access to markets and opportunities. For small businesses this focus will have to be on niche markets, products and services.
Let’s look at some popular B2B platforms and understand what they might mean for your business. If you’re in the business of international trade, and sourcing from China is part of your plans, then AliBaba is the best game in town. By allowing Chinese manufacturers to gain access to overseas sales, AliBaba is providing the platform to be a primary or supplementary sales channel. Additionally, their investments in logistics, credit services (trade finance), inspection services and various other support services in the export process enable their platform to add tremendous value to their clients businesses. I actually feel the same way about the Amazon Marketplace. While all the attention these days is focused on Amazon’s growth in sales, the thing that many people overlook is the company’s fulfillment services and the marketing channel it offers via its Marketplace. This is a sensational service that really allows a business owner to just focus on product and sales. Amazon and suppliers can provide the turnkey services of drop shipping, order fulfillment, and final delivery. I also think one of the hidden marketing gems of Amazon is it’s list of “Top 100 Products on Amazon” and the data it publishes on top sellers in each category. This is akin to an app maker landing on the Apple app store Top Free Apps list. It really has the potential to keep sales growth going in a manner that very few businesses can do on their own.
A smaller platform that was successful in recent years, and one that has had a significant impact on my vision for CoLoadX is OpenTable. While most consumers knew it as a business that drove reservations (transactions) to restaurants, very few people were aware of the fact that OpenTable software literally ran the front end of the restaurant. This represented a significant value add for its customers and allowed them to remain ahead of their competition. At CoLoadX we’re taking a similar approach by not only providing a marketplace for freight forwarders and NVOCC’s, but also by delivering technological solutions that actually help our clients run their businesses better. As a result, we offer a sales channel, a dynamic procurement tool, a marketing capability currently not available in house, and eventually a completely streamlined and re-defined approach to logistics that fits with the trade dynamics of the 21st century. This is a platform that’s about much more than shopping for rates and driving down prices.
Small Business Turns the Tables
If you’ve had the good fortune of working for Altria, Coca-Cola, Pepsico or Procter & Gamble and companies of this caliber then you’ve been part of the finest marketing organizations the world has ever known. A few years spent with them will provide you with more marketing knowledge and insight than most MBA programs ever can. Their resources are virtually unmatched, their product mixes can withstand market segmentation down to very minute levels (looking for natural sugar soda at a Caribbean grocery store in Richmond Hill, NY? Pepsi has you covered!) and their supply chains guarantee they’ll always have the lowest cost of inputs and raw materials.
And now…your small business is making them sweat bullets! The small enterprise actually stands a chance. Homemade soda from Brooklyn can get the same level of attention as Coca-Cola. The very size that has given big business its advantage over small business is now becoming it’s hold back. As the internet levels the playing field in terms of access to customers and business infrastructure, the company who loses the most is the one with the largest structure, biggest payroll, most amount of office space, etc. That is not your small business!
Now if a restaurant software platform and an ocean freight logistics platform represent a value added approach beyond buying, selling and driving down prices, what might a niche platform look like? Well this is where I think technology will enable the development of small, closed platforms that benefit sole entities. Think back to the McDonald’s marketing budget example here: franchisees pay a piece of revenue for marketing and advertising support but wind up being the sole beneficiaries of that expenditure.
Similarly, small businesses will have the ability to make larger investments in digital platforms that are meant for the sole benefit of themselves and their customers. Depending upon the size of the undertaking, this may require substantial investment from outside sources, or may be achieved by allocating funds saved through the digitization of other business processes (do you really need to pay someone $40,000 annually to simply “keep track” of office supplies in this day and age!?). However the platform is financed, the key to remember is that the benefits accrue solely to your business in the form of improved customer service, higher value add to clients, and ultimately sales and profit growth.
Imagine you are a customs broker specializing in the fashion industry. Finding a cheap trucking rate from the airport to the downtown showroom is not how you’re adding value to your customers business. You’re adding value with your knowledge of import regulations, and the ability to facilitate clearance through various government agencies (Customs, health bodies, environmental agencies, etc.). The other value you’re adding is in centralizing the process and making it turnkey, and hence easy, for your client to do business. (Trust me, “easy” is one of the biggest value add features you can ever give someone). Why not build a platform that centralizes all the flow of information related to such work AND attracts customers in need of such service in one step? Once you’ve created a solution like this, the sales and marketing becomes easy. Customers will pay for your knowledge and expertise if you make it easier for them to work with you. AliBaba and Amazon are going to fulfill orders but they are not going to stand in line at the nearest Fish and Wildlife Service office with a stack of documents in need of stamping. This is where your business gets to preserve its lead in the very specialized market you’ve been servicing for decades or more.
I have the privilege of running the best air freight business in America at Crescent Air Freight and these are exactly the types of initiatives we’re working on for our clients. In verticals such as automotive accessories and parts, chemicals, medical equipment and petroleum industry products we’re working on platforms that will allow our customers to gain much more than transportation services as they interact with us. We’re actually going to enable market opportunities for our clients that they never could have accessed before. Better yet, we’re going to provide these opportunities to our clients with no sunk costs or up front investments for them to make. This is how technology is empowering the small business like never before. We couldn’t even dream of this stuff 5 years ago!
If you’re looking for a more B2C approach to platforms, imagine being a wholesaler of cosmetics who creates a one stop services platform that enables a small French manufacturer to sell directly to customers in Malaysia. Or perhaps a platform could be built by an individual in Bahrain allowing consumer products to be sold directly into her country from anywhere in the world – a single person distributorship powered by market knowledge. Yes, AliBaba, IndiaMart and so many others are doing this, but they’re still going to struggle with scaling those services which only a small business can provide. Also, the existence of large platforms won’t cannibalize small business sales. Uber did not end the taxi, instead it exists in parallel with the traditional taxi business model. The same will be true of all small businesses. You can work with the big guys for higher volume, lower margin business and yet build your own platform for higher margin direct to consumer sales. No more wholesalers to squeeze your profits, and no more risk of being tied to one giant customer as is often the case with small businesses.
Going forward, the challenge for small businesses will be to update and modernize business processes without losing sight of what made them so successful to being with.
Remember, what I said earlier in this post: “…you cannot truly scale service”. That doesn’t mean small business owners can afford to sneer at “Internet mumbo jumbo” or sit around and reminisce about the days when business was done with a handshake. What it does mean is that now, more than ever, small businesses need to completely change their approach to doing business and it starts with customer acquisition. Businesses at any given moment can have multiple problems, but if revenue is addressed then all other problems become easier to fix. Platforms – both large scale ones as well as small private ones – will be the primary path to revenue growth from here onwards. The application of technology to the “back end” processes must follow in order for the business to be in sync of course, and some companies would be wise to start by getting their house in “digital” order before going after more business. The point here is that price, capital and investment risk are no longer excuses for small businesses not to pursue growth.
Earlier on in this post I touched on the concept of myth and its relevance to everything around us including quantitative elements such as data. Myth can be expressed in many forms including religious law, superstition, cloud formations and just about anything else one could imagine. The myth that America thrives on – the very cornerstone of the country in fact – is that of opportunity. Wealth is of course measured in any number of resources, but the one thing that America – and really any society – rises and falls on is it’s ability to spread opportunity. So what does this all mean for data, platforms, and doing business online? It’s all about spreading opportunity. Today the internet is pushing opportunity beyond America’s borders. Businesses operating in societies where opportunity is scarce can use an internet connection to “make a sale”. Ebay can find a buyer for grandpa’s collection of bottle caps from Pakistan. Etsy can deliver opportunity for handmade goods from a home based business in Sudan. This is how we get from myth to opportunity to data and finally commerce via platforms. The place where opportunity delivers measurable, exciting results is in the field of commerce and every small business embodies the very hope that this opportunity brings to life. Building a marketplace that facilitates leather wallet imports from Bangladesh; setting up a company page on LinkedIn; showcasing goods on Instagram and Pinterest – these are the opportunities your business needs to avail today in order to ensure growth. Your future depends on it!