Why Small Business is suddenly Big Business

Online, it's much the same. Early this year, the fad was to launch a pharmacy site. Next it was pet sites. This quarter's fad is sites aimed at small business.

Some small biz sites have been out there for a while. Now we're seeing a rush of new ones. Why the surge? Because small business is a massive untapped market. Already more than 30 million small business employees have Web access in the U.S. alone, according to Cahners In-Stat Group. Click for more.

Sounds like an enticing opportunity -- until you realize how hard it is to corral small businesspeople. By contrast, big business is easy to target. You just set your sights on the Fortune 1000. But there has never been an easy way to locate and aggregate the millions of small businesses that dot the landscape. Or to aggregate their spending power. For decades, this problem has stymied many of the best marketing minds.

The Web promises to change that, by attracting small business users to sites that provide crucial services. This huge opportunity has vendors and venture capitalists salivating.

They're excited now, but many of them will be in pain within 18 months. We don't have room for dozens of small business sites. Only a handful will survive. The rest will die or (more likely) be acquired.

Whether you're a customer, a competitor or an investor, you need to pick the winners (and avoid the losers). A small business site needs three things to have a chance to win:

The right strategy. The winners will be those who play the same way AOL played for consumers and Amazon for e-shoppers. They will acquire customers first and worry about profits later. The old business model was create a product, then find customers. The new business model is to find customers, then create products and services.

The right numbers. It's hard to find numbers on private companies. But most of the firms in this space hope to go public in 2000. Read their SEC filings and take a hard look at numbers such as:

• Registered users. I don't care how many visitors it gets, a site doesn't "own" its customers until they register. Equally important is the number of active email addresses with permission to mail. Without email permissions, a site has no way to reach its registered users
• Customer acquisition cost. Tells you if the site can afford to get to critical mass.
• Gross margin. You can't "make it up in volume" unless you've got a bigger-than-average margin.
• Sales per customer. It is especially valuable to track the trend over time. Are customers spending more time and money as they become familiar? Or does the interest wear off?

  The right magnet. Most small business sites secretly (or not so secretly) eventually want to sell anything and everything. But you can't be all things to all people. You need a magnet, something that attracts users and keeps them with you. Then you can start offering more and more things to those customers.

  Turn to page two, where I've listed five of the most interesting sites, with comments on their strengths and weaknesses.

  There are dozens of small business sites. I have picked out five of them for discussion. I welcome your comments on these and other sites.

  In alphabetical order:

  Microsoft bCentral. One of the most recent entrants and already one of the best. A boring, impersonal site, but fast and with a collection of useful services, anchored by Microsoft's banner exchange. Will Microsoft go the distance? Or will it grow impatient and move on, as it has done with so many other online efforts. Click for more.

  Onvia.com: A leader. Uses ecommerce services as its magnet. Ultimately plans to offer virtually every service a small business will need. Problem: A vague, confusing branding campaign. Because the company knows it wants to be "all things" some day, it is afraid to be specific about the benefits it offers today. Mistake. Click for more.

  SmartAge: One of the real leaders. Uses a banner ad exchange as its magnet. Now adding more and more services. Has the money to acquire or partner to get big fast. Despite an early start and an early lead, has failed to get mind share as the dominant player, a mistake that will be expensive to rectify. (Disclaimer: I am a member of the advisory board of SmartAge. I receive no compensation and I do not have any financial stake in the company.) Click for more.

  Works.com: Offers a slick purchasing system as its magnet, allowing small businesses to buy all their supplies online. Could easily enlarge to other product categories and other business processes. Unclear: Whether the typical small businessperson is sophisticated enough to appreciate the value of automated systems. May have more appeal to medium and large firms. Click for more. BTW: The Works.com purchasing technology was one of my previous Natural Born Killers (click for more).

  Workz.com: Uses how-to content as the magnet. Does the best job I've seen yet at creating high-quality, high-value original editorial. Problem: There's so much content on the Web, it's hard to get users to value one site above another. Plus, the company is behind in its marketing and customer acquisition efforts. Click for more.

  Here are five more sites worth a quick look:

  BigStep: Helps build professional-looking ecommerce Web sites. Click for more.

  Office.com: Informs customers of industry trends, news and gossip. Click for more.

  Officedepot.com: Office supplies are the magnet, but the company has started to offer content and services as well. Click for more.

  Officesupplies.com: A virtual supply store and resource center. Click for more.

  Staples.com Same story as Office Depot. Click for more.

  This story of mine has gone on too long. So does this category. There are at least two dozen other sites competing for the same audience. Over the next 18 months, watch for:

  • Huge consolidation, with acquisitions by key players
  • A landscape with a dominant No. 1, a close No. 2 and lots of also-rans
  • A winner who's done the best job aggregating customers and then surrounding them with products and services

  As fads go, I'm encouraged by the heated competition in this space. It forces all of the players to do a better job. And I can enjoy it without having to pierce any of my body parts.