Ben Thompson analysis

Social media and search are keys to SME profit growth

Most operators of small and medium-sized enterprises are focused on niche markets where they can make good profits if they have a differentiated offer and a reliable way of reaching and retaining customers.

While the pace of change driven by the big technology companies has wiped out some businesses, many have adapted the way they work to accommodate the changing habits of consumers.

Ben Thompson, an analyst, provides regular commentary on how the money flows through markets including media and consumer packaged goods (CPG). He explains how the value is created and where the big money is being made.

Harvesting the profits

Thompson’s recent article on the US razor blade market argues that Procter & Gamble used to win by focussing on four parts of the CPG value chain (research and development, manufacturing, shelf space and marketing) to “harvest” most of the profit while leaving logistics and retailing alone.

In the shaving market, new competitors challenged this with a direct to consumer (DTC) model where they focused on manufacturing, retail and marketing using the fact that the internet offered unlimited shelf space. However, the real winner is Facebook which controls the advertising and audience data that connects customers to the blades.

“Facebook really is better at finding [DTC companies] customers than anyone else,” writes Thompson. This means the DTC companies face ever-greater costs to acquire customers by advertising on Facebook.

Delivering the customers

An area where UK SMEs have seen significant change is in food delivery. Just Eat and others have transformed how people think about eating at home and become a key part of the value chain for restaurants. However, like DTC companies, restaurants now face ever-greater costs to retain customers.

In an article for Reforming Retail, Keith Pascal, an investor in restaurants, writes that the “delivery companies can weaponize my own data against me. [They] understand that I might sell [a] high volume of burritos on Thursday’s at 5 pm and then turn around and auction my customers’ demand to the highest bidder (which is the restaurant willing to pay the highest commission for that order).”

The risk that every SME faces when building their customer base through social media, search and apps is that while they offer you easy access, they can also lock you out of the market. The big technology companies control the customer relationship.

Find the right niche

As these companies squeeze more and more money out of the value chain, if you stay in the old P&G world you will find your margins squeezed even more. If you move into the new world in partnership with a digital platform, at some point soon you will also find your margins squeezed.

However, the good news for SMEs is that many operate in niches that are simply too small for the big technology companies to compete in. So you can use their platforms to win customers and retain them. The best way to do this is to carefully design your value proposition so that it stands out and generates repeat business.

Acknowledgement: Image is by Ben Thompson

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