What the Amazon Effect Means for Your Small Business

When Josh Silverman took over Etsy (an e-commerce website focused on handmade and vintage items), he faced immense pressure to revive the company financially.

He didn’t disappoint. While shedding jobs and increasing holiday promotions, Etsy swung from a $29.9 million loss (in 2016) to an $81.8 million net income in 2017.

Managing this feat in the face of Amazon’s competition was impressive. Amazon notched $51 billion in net sales in the first quarter of 2018, recently confirming it has exceeded 100 million Prime members globally. In contrast, Etsy has 1.9 active sellers and 33.4 million active buyers.

Amazon is everywhere: delivering groceries, storing music, and putting items at your doorstep in two days or less. Amazon has been so present that it has become a verb: as in, “I Amazoned it.” While Amazon brings smiles to many, it brings tremors to some small businesses. Many are outraged at the demise of mom-and-pop shops, and even large-scale retailers have taken hits.

What It Means For Small Business

The Amazon effect is a catchphrase used to describe how Amazon has influenced our interactions with other businesses.

Because so many people are Amazon subscribers, this platform has raised expectations for shopping experiences. As writer Corey Pemberton notes,

“Because the vast majority of us use Amazon regularly, we’re well aware of a new kind of customer experience. We used to drive to the shopping mall, painstakingly search for items, and wait in long lines with little complaint. But now that we’ve experienced the joy of picking out things in our pajamas and clicking to have them shipped straight to us, the alternative seems substantially less desirable.”

Subsequently, expectations of all businesses have increased.

How Your Business Can Adapt

Here are four ways small businesses can adapt in the wake of Amazon’s influence.

1. Work to develop distinct, personalized products.

Part of what makes your business irreplaceable is the individual products only you can produce.

While resellers can undercut some sales, a small business with a unique, quality product can’t easily be replicated.

2. Partner with e-commerce platforms.

A recent Insureon insurance company poll of 2,400 business owners showed 68 percent of businesses surveyed said that online retailers had a positive impact on their business:

“[Online retailers] have forced small businesses to embrace e-commerce as a critical route to reach their consumers and revenue source,” said Jeff Somers, president of Insureon.

Businesses that don’t sell online will struggle to stay relevant in the modern age, but e-commerce doesn’t just mean partnering with Amazon. Typically, a small business’s website is the most common place to sell.

3. Feature customer ratings and reviews.

When buying online, people need extra input to tip toward commitment.

When you’re looking to buy, who do you trust more: a long-time neighbor or a sophisticated salesperson? Obviously, humans are biased toward “ordinary people.” One of Amazon’s best features in their abundance of ratings and reviews. Capitalize on this yourself and allow the words of others to convince your prospects.

4. Become a destination.

Amazon is convenient, so make your business an experience, not just an errand. Change your product mix regularly and make it enjoyable for people to physically “discover.” Add entertainment with lessons, parties, samples, or anything to engage families. Tell your story and give people pride in doing business with you.

An Enhanced Customer Experience

Amazon isn’t killing small business, but it is changing the way we buy and sell.

Payoneer e-commerce manager Iain McNicoll says Amazon has given entrepreneurs a chance to create customer experiences they might have otherwise been overlooked:

“People see Amazon as crushing small business,” McNicoll said. “Really, I think it opens up a door for small business, allowing them to now reach new customers that they wouldn’t have been able to reach in the past.”

Small Businesses Have a Big Reach

A tiny, Ohio-based Vita-Mix corporation has been grinding and blending for 70 years.

Known for its high-powered, durable blending machines, “Vita-Mix” was coined with an emphasis on “vita,” meaning “life.” The company was born in 1921 when founder William Barnard, after helping a friend through a significant illness, realized the tremendous impact whole-food nutrition had on health. Simple Vitamix products evolved to industrial strength mixers that could puree raw foods, blend hot soup, grind grain, or knead bread dough.

Vitamix rarely sold products internationally before the late 1990s. But as sales slowed in the U.S., the third generation of Barnard family owners decided to go global. After hiring international sales manager James Smith, exports soared to 20 percent of yearly profits, growing hundreds of new jobs in the outskirts of Cleveland. “Exporting is the salvation of our standard of living and the security of our workers,” said Smith. “It makes me proud as heck.”

A Growing Reach

Vitamix is just one small business with a large global reach.

According to 2017 statistics from the Small Business Association, nearly all of U.S. exporters are small businesses. Small businesses exported $440 billion in 2015, from nearly 288,000 firms representing 97.6 percent of all exporting firms in America. Forty-eight percent of businesses said it took them just a few months of research before they started exporting, while 36 percent said it took them a month or several months to get started.

Small businesses that export report increased sales, diversified markets, and increased long-term stability. Vitamix CEO Jodi Berg said Vitamix now exports at award-winning levels to Europe, Asia, and Australia. But before that could happen her team had to disrupt a stable business plan with a new, global vision. Does she see herself as an entrepreneur who took risks?

“I don’t,” Berg said. “To make big things happen, you have to make big moves. But big moves don’t have to be risky. If you describe a risk taker as someone who takes big moves, I’ll be that. But we did our homework.

Four Remarkable Small Business Facts

While big business often dominates headlines, small businesses play a vital role in exporting products, creating jobs, and producing wealth for thousands of families.

Here are four remarkable facts about the big impact of small businesses:

1. Nearly all are small.

Small businesses make up the vast majority of companies in America, comprising 99.9 percent of all firms. Out of 29.6 million businesses, all but 19,000 are small!

2. Half are home-based.

A home-based business may have activity outside of the home, but it is operated primarily from the home.

Industries where home-based businesses dominate include information (70 percent), construction (68.2 percent), and professional, scientific, and technical services (65.3 percent).

3. Involve family and personal financing.

About one in five small businesses are family-owned, and 21.9 percent of small firms have used personal or family savings (versus business or banking loans) to resource expansion.

4. Durable.

The one-year survival rate for businesses hit 79.9 percent in 2016, the highest level since 2006.

About half of small businesses survive five years or longer, and one-third survive 10 years or more. The longer a company is in business, the more likely it is to stay in business.

According to the National Association of Small Businesses, entrepreneurs say economic uncertainty, health insurance costs, and a decline in customer spending or cash flow are the biggest challenges they face. Still, most business owners are fairly optimistic: 75 percent say they’re confident in their own business and its future.

Leaving a Legacy with Your Small Business

In the 1950s, a young boy named John was enthralled by every chance to visit his best friend.

This family owned a soda pop bottling plant, which sparked a lifelong love for exotic flavors in John Nese. Years later, Nese brought soda to his family’s Italian grocery store in Los Angeles, known today for its 600 soda and beer flavors from around the world.

The variety wasn’t always this broad. Nese said the change came 20 years ago when independent grocers were being squeezed out by chains. One soda dealer offered a profit of $30 a pallet if Nese would streamline shelves and eliminate variety. Nese wouldn’t bite:

“Nuts to that,” he said. “A light bulb went off (and I said), ‘You know, John, you should be happy you own your shelf space, and Pepsi doesn’t, and you can sell anything you want.’ So I went out and found 25 brands of little sodas.”

Nese says this “freedom of choice” philosophy defines his family and his business, and customers can even make flavors of their own at the store. Rows of cane sugar syrups line the wall, along with bottles, caps, and carbonated water dispensers. “Whatever you think of, you can make!” Nese exclaimed.

This passion has fueled the Galcos’ grocery for over a century, and the Galcos plan to continue this legacy.

Successfully Passing Down Your Business

Small businesses make up around 99 percent of U.S. companies and 20 percent of these are family owned.

These businesses play a crucial role in creating jobs, exporting products, and generating wealth. As Baby Boomers reach retirement, 4 million of them will be handing off their privately-owned small businesses; in the next 15 years, we will see the largest transfer ever of private business to the next generation!

What are the keys to successfully navigating these transitions?

Preparation and communication are essential. Here are a few steps businesses are taking to pave the way for a smooth handoff:

Think decades in advance.

Small business owners often wait too long to start planning a transition, and typically only half of those planning to retire have identified a successor.

Justin Goodbread, a certified financial planner and exit planning advisor says the process is especially weighty for families:

“Families will most likely also have to cope with emotional and psychological issues that surface during a generational transaction. I believe a 10-year period is needed to successfully navigate a family business transaction.”

Sketch out clear successors and exit strategies.

A strong mission statement and business plan, a clear exit strategy for senior leaders, and an early commitment from successors are important hallmarks to longevity.

Build the right team.

Many businesses believe they can manage their transition independently, but this assumption is costly.

Healthy handoffs will require input from lawyers, accountants, financial advisors, business valuation experts, and a family business planner to shepherd the process. Though senior leaders may wish to gift the business ownership, experts believe financial buy-ins allow successors to get some “skin in the game,” as they emotionally double-down in commitment, maturity, and vision.

Be flexible as you exchange roles and responsibilities over time.

The gap between generations requires effective communication and an organized structure for each person involved.

This should be reviewed regularly to adjust the roles or time commitment of each team member. Goodbread recommends younger successors earn more responsibility on a day-to-day basis:

 “It has to be earned or merited,” he says. “The problems start when a junior takes over a senior’s position in the company without earning it or wanting the position.”