Small Business Labs

Defining and Segmenting Small Business

CNN Money's article The SBA Quagmire: Rebuilding a ravaged agency covers a range of issues facing the SBA.  Buried in the article is a discussion of how to define small business.

This is an issue that constantly comes up when discussing the small business sector.  The definition of small business used by many (including us) is companies with fewer than 500 employees. 

This definition is widely used because this is how the data is reported by the SBA Office of Advocacy (which, interestingly enough, is not actually part of the SBA).  The data comes from the U.S. Census Bureau.  It does not include farms and a few other categories. 

This definition is extremely broad and not useful for many purposes.  Because of this, we segment the U.S. small business sector into:

1.  Personal businesses:  these are what the SBA Office of Advocacy calls "non-employer" businesses.  This segment includes a wide range of full and part-time contractors, freelancers and other self-employed workers.   There were just under 21 million personal businesses in the U.S. in 2006 (latest data available). 

2.  Micro businesses:  these businesses have less than 5 employees but more than zero.  We don't include personal businesses in the micro business category because employer businesses tend to behave differently than personal businesses do.  There were roughly 2.8 million micro businesses in the U.S. in 2006.

3.  Mainstreet small businesses: a term we've borrowed from Intuit, we define this group as more than 4 employees and less than 20.  These companies tend to be owner/founder dominated but often have managers and organization structures.  There were roughly 1.7 million mainstreet small businesses in 2006.

4.  Mid-level small businesses:  these are firms with between 20 and 49 employees.  Mid-level small businesses often operate with management teams and professional management.  This segment had about 406,000 firms in it in 2006. 

5.  Large small businesses: our "jumbo shrimp" segment, this group goes from 50 to 500 employees.  Most of these firms are very different in scale, scope and operations than smaller small businesses.  Almost all have professional management.  There were about 220,000 firms in this segment in 2006. 

We also segment deeper in our work (service versus manufacturing, by industry, high growth, etc.), but use this as our base level of segmentation.   

Detailed Data on the Consumer Internet Trends

Someone forgot to tell Morgan Stanley Internet analyst Mary Meeker that the latest trend in presentations is lots of pictures and little or no text or data. 

Meeker and her army of research assistants create long presentations rich with data and charts explaining the latest consumer Internet trends.  Her most recent presentation also has a section on the economic downturn.

One of her key points is that the digital consumer will likely spend more time online during the recession.  Key quote:

"Our bet = At margin, consumers spend more - not less - time on Internet during difficult times - it's a cheap/efficient/transparent thrill!  Undermonetized social networks/video/VOIP driving powerful usage growth - opportunity for innovative marketers to capitalize on low cpms."

Great source of data and information on the consumer Internet, mobile computing, cloud computing and the economic downturn. 

Niche Manufacturing in Brooklyn

A trend we've been following is small manufacturing firms competing successfully through strategies built around niche markets, customization, automation, flexible systems, design services, and delivery speed. 

The New Yorks Times article In New York, No Crisis for Niche Manufacturers provides several examples of this trend.  It also talks about the growth of niche manufacturing companies in Brooklyn.  Key quote:

"In Brooklyn, the number of jobs for niche manufacturers, which are not only small but also tend to have local clients, rose by 17 percent between 2001 and 2007, said James Parrott, the chief economist of the Fiscal Policy Institute. In the same period, the number for manufacturers making products for mass markets declined by 48 percent.

Great Set of Trend Articles at Small Business Trends

Small Business Trends has an excellent series of articles on 2009 small business trends.  So far it includes:

1.  Top 5 Trends for Small Business Finance 

2. Top 10 Resolutions for a More Profitable 2009

3.  The Top Franchise Trends for 2009

4. 5 Key Microbusiness Trends for 2009

All are well worth reading.  And. of course, I like to see how they compare to our list.

The Advantages of Staying Small

Good article on the advantages of staying small in the NY Times.  A Business Forced to Shrink May be Stronger covers a number of reasons why being and staying small can be advantageous.  Good quote from marketing Guru Seth Godin:

"Small means the founder is close to the decisions that matter and can make them quickly. Small is the new big because small gives you the flexibility to change the business model when your competition changes theirs."

To expand on Seth's point, small businesses have the ability and agility to quickly adapt and adjust to a changing business environment. 

We've recently started a project looking at small business innovation and we've already seen many examples of this.  Simply put, small businesses can innovate much faster than big businesses.

 

Using Twitter Again

As part of my new year's resolutions I have started using Twitter again.  I stopped using it about a year ago.  I stopped because I was spending way too much time exploring fun topics and fooling around. 

Simply put, I wasn't disciplined enough in my use and ended up wasting time.  I hope to stay focused this time. 

My plan is to use Twitter to post links to resources and articles related to small business that I find interesting, but don't merit or require a regular blog post. 

My twitter name is smallbizlabs.

HubSpot's 2009 Online Marketing Predictions

HubSpot is an search engine marketing company that targets small and mid-sized businesses.  They recently released an online marketing prediction list for 2009. 

The entire list is quite interesting and useful, but one prediction jumped out at me:

"Marketing Software Will Become as Critical as Accounting Software.Companies like HubSpot, Constant Contact, Unica, Omniture, etc will demonstrate that a company without marketing software is a company without a future. The software the marketing department uses will become more important than the creative agency they use. Software will be as critical for marketing as it is for accounting."

In our research we regularly see examples of small businesses that have gained substantial competitive advantage through online marketing.  We agree that online marketing tools and software are becoming mission critical for an increasing number of small businesses, which is why we included this in our 2009 Small Business Trends list.

Some Economic Forecasters Optimistic About 2009

The NY Times article Some Forecasters See a Fast Economic Recovery covers the relatively optimistic 2009 consensus economic forecast of 50 professional forecasters compiled by Blue Chip Economic Indicators.  Key quote:

"In the midst of the deepest recession in the experience of most Americans, many professional forecasters are optimistically heading into the new year declaring that the worst may soon be over."

The consensus of this group is the economy will start recovering in the 2nd half of 2009 driven by federal stimulus spending and lower oil prices. 

Lower oil prices should have a substantial positive economic impact in 2009.  The average American household uses around 900 gallons of gas per year (assumes the average American household drives 18,000 miles per year and averages of 20 miles per gallon - see this Brookings study for more detailed data on vehicle miles driven). 

If gas is $2.00 a gallon cheaper in 2009 than in 2008, the average household will save $1,800.  That is potentially a strong stimulus for the economy.

Steven Hansen shares his much more pessimistic forecast on the Seeking Alpha blog.  But his post also includes links to a number of other economic forecasts - all of which are more optimistic than his.

Does Recession Lead to Increased Small Business Formation?

We released our annual small business trends list this week.  We got a lot of questions related to our forecast that the recession will lead to increased numbers of small businesses in 2009.  Many feel the number of small and personal businesses will decline in 2009 due to the recession.  Here is our response.

Academic literature has long linked rising unemployment to increased small business formation and rising self-employment.  A.R. Oxenfeldt argued in 1943 that when faced with unemployment, many will turn to self-employment.  This is referred to as the "refugee effect." 

More recently, the paper Does Self-Employment Reduce Unemployment empirically shows the refugee effect exists for OECD countries (click here for a summary).  The paper also contains background and citations on the academic research on this topic.  And although some studies question the refugee effect, most agree it exists. 

U.S. data also shows that in the last 2 recessions small business formation has increased.  Below is a chart from Warrilow showing SBA data on small business births and deaths.  As the chart shows, small business births exceeded deaths during the prior two recessions. 

           

These data are for employer businesses.  We have less historical data for personal business (single person, or non-employer businesses) because the government has only been collecting data on them since 1997.  But the 2001 to 2003 recession period saw the number of personal businesses grow from 16.9 to 18.6 million.

And while many forecast errors start with the words "this time it's different," there are several reasons why we think small and personal business formation rates will be higher in 2009 than in past recessions:

1.  The costs of starting and maintaining a small or personal business are substantially lower than in past recessions.  PCs, the Internet and low cost office and communications equipment make it much cheaper to start a small or personal business. 

2.  The risks of starting a small or personal business are lower.  In the 80's and 90's starting or working for a small business was often viewed as negative by large corporate employers.  This meant leaving corporate America to start your own business or work for a small business greatly reduced the chances of returning.  This is no longer the case and many larger corporations now see it as a positive.

3.  The demographic drivers are stronger than in prior recent recessions (see our trends post for details). 

We believe small business failures will also increase in 2009.  The recession is not going to be kind to many small and personal businesses.  Also, many surviving small businesses will see their revenue and income decline in 2009.   

But we think the net impact will likely be an increase in the total number of small and personal businesses in 2009.