Published on Monday, December 02, 2013
by Professor Jay Prag
Why should we care about small businesses? Small business owners and their employees care for obvious reasons, but why should we, the customers, care? And why do they need their own day?
There are many ways in which small businesses are at a disadvantage. Lacking the size of their larger, sometimes national competitors, small businesses usually have higher prices. This concept is known as economies of scale: larger businesses can spread their fixed costs — their overhead — over more units, allowing them to charge less.
Renting a billboard for a year costs $70,000 along the 210 Freeway. If I have one store that attracts 10,000 customers per year, I have to raise my price $7 per unit to cover the cost of that billboard. If I have 10 stores that attract 100,000 customers, the billboard cost per customer is only 70 cents. Of course the point of the billboard is often to grow my business but my one store really can’t afford to do that.
Inventory is an expensive upfront cost as well. A retail store must front the cost of its inventory and cover that cost with its sales. With national buying power and nearby warehouses, Walmart Supercenters can offer low prices on a variety of goods. The now almost extinct mom and pop market has neither national buying power nor large nearby warehouses and thus offers less variety and charges higher prices.
A small business like my own employer, the Drucker School of Management in Claremont, cannot compete on price or variety grounds with larger competitors. But we do have some things going for us.
I was reminded of this recently, when on the eve of my mother-in-law’s arrival I needed an emergency drain clean-out. In the Yellow Pages and on the Internet I found lots of low price offers from national companies. I called one, lets call it Super Rooter, with a splashy ad touting its many services, low prices, and guarantees. After an hour, the technician said he couldn’t get the clog open and called his supervisor. The supervisor said there would be no charge, per the guarantee, but I also had no working sewer line. He suggested a much (MUCH) more expensive service surely would work. I agreed, obviously having few options, and had but to wait until later in the day for the more expensive machine to arrive.
In the meantime, a local contractor and good friend dropped by. Upon hearing this story, he suggested I call his son-in-law, a local plumber. To my shock and surprise the local plumber cleared the clog in 20 minutes.
So I don’t call national, low price plumbers anymore. I don’t trust them. But I pay a little extra. What do I get for that higher price? More generally, when do you really need a small, local business?
Think about how many times you rely on a business for its knowledge and skill. If a local plumber loses customers to bad advice and shady business practices, it goes out of business. It needs repeat customers. It needs word of mouth advertising to substitute for the billboard. A successful small business will try its very best not to send a customer away unhappy.
Big national businesses rely on volume; on lots of customers. So they really don’t care too much about any one customer. The local plumber, the small business school, and the mom and pop store can’t survive if they think that way.
So if the product your are buying from a business is truly generic and requires no customer-specific knowledge or skill, the large national business will win your clientele; it’s cheaper. But if you want advice, skill, experience, and a desire to make you, the individual customer, happy, you turn to the small, local small business.
We need small businesses because it is their business model to provide good, customer-focused service. And a group-hug day like Small Business Saturday gets us to think about this reality, and to consider how much worse off we would all be without our many small businesses.