May 26, 2020

Tech Companies and Small Business Need Each Other

Tensions between tech and small business

There has long been tension between technology companies and small business, but as Covid-19 threatens economies across the globe these tensions have been on display as never before.  Amazon, Uber, Grubhub, and Doordash promise their retail and food service partners expanded markets and new customers, but at great cost to small businesses that already operate on minimal margins.  But the real problem isn’t this initial marketing cost, it’s the reality that each new customer these platforms attract is likely to purchase through the platform moving forward, making a one-time marketing cost permanent.  And at the same time, the convenience of using a single online ordering system pushes existing restaurant customers, even the most loyal ones, to migrate to these platforms, further undercutting margins and threatening the sustainability of the business.

Tech platforms depend on scale – density is required to make their models profitable, which is why new tech is almost always rolled out in cities first before eventually migrating to suburbs, exurbs, and rural communities.  Scale allows customers to negotiate more favorable rates, so big companies consistently get a better deal on tech services, while the smallest customers lack the leverage to strike similar deals.  Nothing here is surprising, but it all adds up to a huge burden on small businesses, especially in more rural communities.

Why they both need each other

  1. Each small business is, first and foremost, a potential customer or partner for technology firms. Platforms like Grubhub and Doordash depend on a robust food service ecosystem to create the scale they need to be profitable.  Other platforms operate in the same way.  Ensuring your customer base and business model are sustainable is simply good business.
  2. People love small businesses, and killing them is a bad look. The Covid-19 pandemic has led to outpouring of love and support for the small businesses – cafes, restaurants, bookstores, and more – that make communities unique. It turns out people really value these spaces and these merchants. They provide something that online platforms will never be able to fully replicate – space to meet and interact with other people. This extends to the heart of Silicon Valley, where many residents are making a pointed effort to transact directly with local merchants, even if it is less convenient. Accelerating the death of beloved local institutions is not what you want associated with your brand.
  3. Technology helps small businesses operate and grow. Prior to the pandemic, labor markets in the U.S. were stretched thin and businesses struggled to hire. Technology and tech-enabled services that make businesses easier to operate and grow are hugely important to these merchants. In short, most value the technology but find the business model too burdensome.

What tech companies can (and should) do

  1. Help small businesses become more resilient by aligning products, services, and business models to the needs of small businesses. All of this should be considered with the understanding that successful customers and vibrant economies are good for business.
  • Revisit and reconsider business models that disadvantage small business
  • Promote local options with targeted advertising capabilities
  • Proactively negotiate fee reductions with regional GPOs and industry associations. This last point seems to have a strong business case for some companies in highly competitive markets (i.e. food delivery), where locking up a regional market with attractive pricing and incentives could promote significant growth.

What small businesses can and should do

  1. Join or form a Group Purchasing Organization, and ask that GPO to negotiate with tech companies on your behalf.
    Small businesses need to band together to create scale, and many are already doing so. Vertical GPOs have long played a role in certain economic sectors, from healthcare to hospitality. These groups are essentially alliances that create scale for members, allowing them to negotiate a better deal for common purchases.  For example, the New Hampshire Lodging and Restaurant Association negotiates reduced member rates for insurance, retirement plans, training, and certification programs, and even credit card processing fees – greatly reducing the administrative costs of its small business members.  Other GPOs are horizontal, serving a broad spectrum of businesses in different sectors. Few focus on serving regional needs, and even fewer are agile enough to keep pace with emerging technologies (or, recently, the impacts of a pandemic).  GPOs can do a better job negotiating favorable, or at least more tolerable, terms for essential technologies.
  2. Find a viable alternative
    Investigate and adopt alternatives solutions that deliver most of the benefits without the burden. Shop around.  See what your GPO can offer.
  3. Educate your customers
    Visibility into the impact that consumer choices have on the local economy is growing. While backlash so far appears to be localized and perhaps transient, it could create enough of a problem that tech vendors give it a second look.  Small businesses need to keep ‘Buy Local’ themes top of mind as we navigate out of the current crisis to create a sustained change in buying behavior.

Related team members

Craig Belanger
Senior Partner & Co-Founder Boston
Richard Crumb
Managing Partner & Co-Founder Menlo Park
Rachel Eschle
Partner & Co-Founder Boston
  • Menlo Park, CA
  • Boston, MA 100 High St,
    Boston, MA 02110
  • Yarmouth, ME 121 Main St,
    Yarmouth, ME 04096
  • London, UK 30 Crown Place,
    London, UK

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