15 min read
Jul 23, 2020
Trends

America's Small Businesses Have Reinvented Themselves—And It's Paying Off

Small businesses are changing business models on the fly. Our data shows they’re already finding success.

Z.C.
Zach CapersSenior Content Analyst

To ensure survival amid economic crisis, small businesses of all kinds are changing operating hours, revamping pricing structures, and adding new payment methods. But more than that, small businesses are fundamentally changing their business models by taking on new delivery channels, services, products, and even customers.

“All of this seemed to happen overnight,” says Sally Matsumae, owner of Asahi Imports, a small Japanese grocery store and delicatessen in Austin, Texas that has altered its business model to keep up with rapidly evolving customer needs. “With shortened business hours and everyone’s fear of leaving their homes, we had to quickly figure out a way to offer online shopping and curbside services.”

In this piece, we’ll dive into the results of our recent business model survey, explore how companies are supporting their business model innovations, and dig into the challenges they're facing along the way to help you gain insight for your own business.

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5 business model changes propelling companies through crisis

In June, we surveyed 577 small business leaders to discover how companies are transforming their business models in response to changing customer behaviors brought on by the COVID-19 pandemic (you can find our methodology at the bottom of this page). A whopping 92% of respondents report pivoting in at least one way, while many have pivoted in multiple ways; only eight percent didn’t pivot at all.

Pivot #1: Adopt a new online delivery channel

By far, the most common recent business model pivot has been the addition of a new online delivery channel (think selling through an online marketplace or taking orders via your website).

“I’ve always wanted to have an online store, but unfortunately it was always one of those things on the to-do list,” says Matsumae. “With the pandemic, we had to act fast. We had to scramble to get some sort of system that shoppers could use to tell us what items they wanted without having to step into the store.”

Asahi Imports added an online inventory to its website along with an embedded Google Form—an ordering system Matsumae describes as “lo-fi” but “reliable.” 

Instead of going it alone, many small businesses partner with online marketplaces and eCommerce services to sell their goods. Our research found that 30% of companies adding a new online delivery channel are using eCommerce software to do so. Ultimately, what matters most is getting your business online—how you do it is less important.

Pivot #2: Develop a new virtual service

Our survey found that two out of five small businesses are creating a new virtual service, such as a yoga class now being offered online or a realtor providing a virtual home tour. Virtual services allow businesses to reposition their essential value proposition around changing customer needs. 

Providing a virtual version of your service or product offerings can also enhance your existing business model by attracting new customers, such as those in distant locales.

Pivot #3: Create a new offline delivery channel

The third most popular business model pivot is the creation of a new offline delivery channel (think curbside pickup or home delivery). Consumers have quickly discovered the convenience of curbside pickup, and it's likely to remain the new normal long after social distancing needs have eased. “We’ve had a lot of customers use our curbside service,” says Matsumae. “It’s almost like a third business … we have the grocery, the deli, and now curbside.”

And while many small businesses have also started their own home delivery service, others choose to partner with third-party platforms to extend customer reach and streamline orders. “I’ve looked at Uber Eats and Chownow, but those services really eat into our costs,” says Matsumae, pointing out the thin margins that small businesses must contend with while pivoting. 

If a delivery platform helps grow your business and significantly increase profits, it might be worth the high fees; otherwise, the costs could outweigh the benefits.

Pivot #4: Design a new product

Companies are also busy creating new products. Of the industries that pivoted to new products, manufacturing was number one, with engineering firms and wholesalers also in the top five. This indicates that many of the companies with the means to develop new products, manufacture them, and bring them to market are taking the initiative to do so.

In many cases, the businesses developing new products are part of industries hit hardest by pandemic-induced closures.

Take AM Linen Rental, a small business that specializes in renting tablecloths and chair coverings for weddings and corporate events. When the events industry suddenly shuttered back in March, AM Linen Rental pivoted to making face masks to compensate for lost revenue. This goes to show that you might only need to reconfigure your resources to fulfill new customer needs.

Pivot #5: Target new customers

About one in five respondents targeted a new customer base or demographic. For companies whose existing customers can no longer purchase their product, there’s no choice but to look for customers who can. 

Stories abound of commercial suppliers selling direct-to-consumer while their business clients are closed. This segment naturally had a lot of overlap with companies that created a new product. More than half of the businesses that chased a new customer demographic also had a new product to sell.

Small businesses that pursued new customers were the segment most likely to report a lack of cash as their biggest challenge when changing business models. Interestingly, this same segment was by far the least likely to add a COVID-19 surcharge to cover personal protective equipment, social distancing, and other related costs. This suggests a dilemma whereby low cash flow companies working hard to attract and retain new customers are reluctant to scare them away with added fees or higher prices.

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Companies that pivoted are 3 times more likely to report higher than expected revenues

We compared the responses of small business leaders who pivoted their business in at least one of the five ways defined above with those who did not pivot. The results were extraordinary. 

When asked if revenue increased, decreased, or remained flat against forecasts, companies that pivoted their business model were three times more likely to report higher than expected revenue compared to those that didn’t.

Despite being only the third most common business model pivot, companies that added a new offline delivery channel were both the most likely to report higher than expected revenue and the least likely to report lower than expected revenue.

Judging by these metrics, the addition of a new offline delivery channel appears to add the most value out of the five business model changes considered in this report. Lending a bit of anecdotal evidence to our findings, Matsumae observed: “In March we had about 20% of sales come from curbside orders and in April about 30%.”

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96% of small businesses are keeping at least some changes

Small business leaders who made changes in response to COVID-19 are resolute in their decisions, with 96% planning to keep at least some changes. A full 43% plan to keep all of the changes they’ve made. “I think curbside shopping and home delivery are here to stay,” says Matsumae. “We’ve always wanted to do it and COVID just sped the process along.”

More than half of our respondents (52%) are very confident that their business model changes will be effective in mitigating the financial impact of the COVID-19 crisis. Eighty-one percent of small business leaders are optimistic that Q3 revenue will beat those of Q2.

But it’s not all good news. We took a closer look at the 19% of business leaders who are not optimistic about Q3 revenues. Of these companies, only 38% have a contingency plan in place for a second wave of COVID-19 outbreaks. For comparison, 83% of businesses that are optimistic about Q3 revenues have a second-wave contingency plan in place—a stark difference.

This data suggests that a significant share of small businesses don’t expect to make it through a second round of closures, and aren’t even preparing for it.

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Marketing software and social media driving customer connections

If a business pivots in the middle of a pandemic, does anyone notice? Only if you let the world know. Our research found that companies are leaning on a two-pronged strategy of social media and marketing software.

Marketing software helps companies identify and convert new customers while nurturing relationships with existing ones. That explains why nearly half (49%) of small businesses needed marketing software to support their business model changes. But when it comes to communicating the latest updates, businesses turn to social media.

A full two-thirds (66%) of small business respondents that made changes used social media platforms to alert customers. And they’re not just posting updates—85% of all small businesses are paying for social media advertising. Nearly a third (32%) of small businesses say they have increased spend on paid social media marketing during the past few months.

Matsumae reports that Asahi Imports uses a combination of in-store signage, social media posts, and website updates to keep customers informed of business changes. She also uses Square software for marketing, as well as contactless payments. “Yelp and Google have a section for businesses to update the community on COVID-related news,” she adds.

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Skill sets changing along with business models

Our research finds that a lack of employee skills required for a new approach is the single greatest challenge small businesses are facing while pivoting, beating out other obstacles including a lack of cash. This makes sense. New offerings such as an online store, a virtual service, or new delivery channel aren’t effective if you don’t have the skills sets needed to operate them. That means businesses must either hire new employees with the required skills or train employees in new skill areas and have them take on new responsibilities.

“At first, our cashiers were juggling pulling curbside orders and handling in-store shoppers,” says Matsumae. “They had to learn how to read orders coming in, communicate with the customer about items, learn how to process contactless invoice payments … it was a lot to handle.”

Matsumae says she’s hired more staff to help with curbside shopping, handle customer traffic, and maintain in-store sanitation efforts. “Everyone’s been working really hard and adapting to all of the changes. We’ve had to make a lot of adjustments and tweaks along the way because I too am learning as we go.”

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The battle to recover and reopen continues

While many small businesses are finding success pivoting amid monumental challenges, a pandemic continues to rage outside. Further shutdowns threaten gains and may be unavoidable unless we find a way to neutralize the virus.

For these reasons, small businesses are adopting numerous health and safety measures, from mask-wearing requirements to enhanced sanitation standards. We asked small business leaders about measures they’re taking while reopening offices and storefronts. Here’s what they said:

Matsumae says Asahi Imports requires masks, frequently sanitizes commonly used surfaces, and has started limiting the number of shoppers in the store. She adds, “If we continue to practice these safety measures, and if customers that visit us help maintain these safety measures, we all can help slow the spread.”

One thing is certain: business as usual isn’t going to be enough to make it through this crisis. Small businesses will need to continue innovating until customer behaviors stabilize. In the meantime, small businesses must help customers feel comfortable walking back through their doors while also meeting them wherever they are—whether that’s online or at the curb.

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Take action:

  • Take steps to move your business online, whether that means a do-it-yourself order form or teaming up with an eCommerce platform that will do the heavy lifting for you.

  • Consider a virtual version of your offerings to maintain business continuity and connection with customers old and new.

  • Don’t overlook the value of adding an offline delivery channel for customers not yet comfortable walking back into your store.

  • Reevaluate your resources to create a new product/service and bring it to market.

  • If your typical customers can’t buy from you right now, pivot to those who can.

  • Visit our resource hub for more information about pivoting your business after disruption.

Methodology

The business model survey referenced in this article was conducted by GetApp from June 18 to June 23, 2020 among 577 respondents who reported executive leadership roles at small businesses with 500 or fewer employees.

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