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October 2, 2006

Four Ways the Internet Is Transforming Small Business

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Much of my current thinking on small business strategy has been shaped by how the nature of business is being transformed by the Internet. Below are four internet-caused business transformations that disproportionately benefit small businesses that are prepared to leverage them.

1. Increasing Market "Efficiency"

The most striking thing to me about the internet is how it tends to make all markets more "efficient." The story I heard that really drove this home for me was when I heard that eBay's founder started the company because he was a rabid collector of Pez candy dispensers and his rolodex did not include enough people of similar interest, so he started a marketplace where people could trade this niche good. The rest is history with eBay being the ultimate connector of sellers of niche goods (vintage Burberry jackets, Fred Lynn baseball cards, Jerry Garcia Band posters, etc.) to buyers of these niche goods who could not otherwise find them in their mall or through their rolodex.

As my co-founder says, the internet is great at connecting makers of left-handed monkey wrenches with left-handed plumbers around the world. It turns out that most small businesses (and startups) have relatively niche-y products that they generally sell to companies in their rolodex and companies two degrees away from their rolodex. The internet disproportionately favors small businesses since it enables them to position their niche goods to people shopping for that particular niche good regardless of the numbers of degrees of separation from their rolodex.

2. On the internet, no one knows you’re a small-business.

At the risk of being cliché, I have included a cartoon that sums up this transformation for me pretty well. When someone hits your website for the first time based on a Google search, the surfer has no idea if you are a one person company or a one thousand person company, they are just looking for a solution to meet a need.

Most small businesses I know have a website that is a copy of their old brochure. The problem with the website starts with the fact that it cannot be changed without serious brain-damage, so it's positioning is as generic (least niche-y) as possible. The rationale here is si mple: When small business owners write the content for their website, they tend to play it “safe” and keep things generic so as to drive away the least number of customers. Since they can’t change things, they feel that keeping it generic is safer (because they don’t know when they’re going to change it again). The other problem is that the website is not seen by Google as relevant -- if you type in the name of the company it is found, but if you type in the market description, it is buried, which essentially means it is non-existent beyond your rolodex.

3. Changing Nature of Business Shopping

I had been consulting for a 25-person venture-backed security software company in Boston for a few months on sales and marketing before getting consumed by my current mission . What struck me was how the folks running the software company were using the "best practices" from the 1980's and 1990's to try to attract prospects and convert them to customers and how utterly broken those practices were in light of how the internet has transformed the way buyers of their types of goods had changed the way they shop.

Ten years ago, a potential customer for this type of niche/new security software would likely go to a Gartner conference, talk to their IBM rep, talk to their Symantec rep, or call Deloitte & Touche. If the potential customer was referred to the software company by one of the major vendors, the prospect would likely engage one of the vendor's sales reps who would be their primary source of information on their products. In other words, the entire sales process involved them talking with humans.

Today, a potential customer for this type of niche/new security software would likely start by searching the phrase describing it into Google. They would then likely visit any of the top vendor websites Google served up, they would likely consume any blogs they found on the topic from the vendors or analysts or customers of the vendor, and they would likely participate on the blog of the vendor that most closely matched their criteria. Once the potential customer had narrowed things down pretty well and was already well educated, then she would likely "self-select" with that vendor through a form on their website. At this point, a salesperson would engage the potential customer and quickly realize that the potential customer knew about as much about the products as he did.

The interesting thing about this example is how ten years ago the whole sales process involved a sales person from the vendor feeding asymmetric information to the prospective customer. Today, the top half of the sales process is completely out of control of humans on the vendor side.

It was frustrating to hear the software vendor's salespeople wonder where the leads were. The reality is that there are potential customers out there for their products, but the prospects' self-identification just occurs a whole lot later in the sales process. The problem this particular software company had was that its website was not "seen" by Google when you did simple searches on their marketplace because it was not optimized, so they ended up having to spend a ton of money on Google AdWords™. Their website was hard to change, so they stuck with lowest common denominator language which put them in a shark tank from an SEO (Search Engine Optimization) perspective. Also because it was hard to change, they were not able to create custom landing pages/messaging based on where the searcher came from. Their website did not have a blog where potential customers could intellectually engage with the founders and technical architects who they really wanted access to (not the sales folks). …I see this set of problems repeat itself in 99% of all small businesses and startups. Business has changed and there needs to be a new set of tools to help you take advantage of the change.

4. Changes In Knowledge Creation & Retrieval

I spent much of my career implementing and selling knowledge management systems. The problem with knowledge management systems is that everyone wants the knowledge that collectively comes out of the system, but no one wants to feed the system. It turns out that even just a few extra mouse clicks to share a nugget of knowledge in a centralized system is more than 90% of users are willing to do. I suppose there are a couple of reasons for this. First, those few extra mouse clicks are a few extra minutes at the office versus at home with their family. Those few extra mouse clicks help the company, but might not do anything to fundamentally improve their bonus that year. This is a somewhat pessimistic view, but I suppose some of their rationale might be that information is power and the lack of transparency increases leverage.

Much has been written about the new crop of web2.0 applications. In my mind, the thing that web2.0 companies got right is a new way of thinking about knowledge management. For example, I use a product called del.icio.us which has replaced my browser based web favorites. Del.icio.us gives me a better way to organize my web favorites (via tags v. folders) than my browser did which helps me personally. The really sophisticated thing that del.icio.us does is that it leverages my (and all its other users) self serving behavior to incidentally create value for the network by giving users a powerful new way to search on articles that is driven by the masses versus driven by some media company. There are numerous other examples of these systems which are fundamentally better at incentives to contribute knowledge which ends up creating much more knowledge.

- Brian Halligan

 


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