While these statistics aren’t particularly new (they come from a 2005 Industry Canada report) I came across them this week while working on a white paper and I think they bear some brief discussion here.
In Canada, 94.6% of businesses by number are ‘small’ meaning that they have less than 50 employees. The actual number startled me a bit when I read it so I felt I had to dig deeper. Looking across the provinces and territories, the numbers are fairly uniform – all within one percent or so – something that really surprised me. I would have expected to find higher percentages in the prairie provinces where there is a higher percentage of agriculture or in Ontario and Quebec, the hotbeds of economic activity. The report really gets interesting when you look at employment and GDP however. These same small businesses that make up almost 95% of the business environment employ only 40% of the population (26.7% in goods producing sectors and 73.3% of service producing sectors) and create only 24% of the Nation’s GDP.
So why do I find these statistics so interesting? I believe that it illustrates the amount of opportunity that exists for small businesses today. Let me explain.
I suppose it isn’t particularly surprising that the numbers don’t line up between businesses by number and GDP or employment given that some of the largest businesses in this country employ vast numbers of people and generate significant outputs contributing to GDP, but it is the size of the chasm in the figures that I find very interesting.
Digging a bit deeper into the report I think I found a few of the keys as to why we see the numbers the way they are.
When you look at the section entitled ‘How much to small business employees earn?’ we can see one of the most significant reasons why small businesses don’t figure more prominently in employment and GDP numbers. In companies with 0-4 employees in the private sector, average weekly income is $620.61, at 5-19 employees it’s only $577.56, but if you look at the companies in the 500+ employee segment average weekly income is $797.45 or a full 28% higher than the 0-4 category and 38% higher than those in the 5-19 employee category.
Does this mean that it is simply harder to earn more money in a small company? Perhaps… but I think it is a sign of something more sinister – our own devaluing of our own worth when we are working in a small business.
Think about your own market segment and the method of competition used by many/most of the small businesses in your market. If your market is typical I think you will find that there is a significant portion of competition that is done on the basis of pricing alone – it is believed that the lowest price wins. But is it really true?
Certainly as a small business your overhead is likely lower than some of your big competitors – lower rents, less infrastructure costs, lower travel costs etc – but while those lower costs might enable you to offer slightly lower prices, they can’t possibly be significant enough to drastically undercut the competition on price. Based on the employment income numbers I would suggest that a bigger portion of the price competition is coming directly out of the pockets of your employees (and yourself as the Entrepreneur) rather than through any warm and fuzzy ‘lower overhead’ proposition.
What we are unconciously doing by competing on price rather than on value is devaluing the work of our employees, limiting the growth of our own companies, and diminishing our output and impact on the National GDP.
I spoke with a woman tonight who made me think a bit more about this exact issue. In five minutes she had provided me with an overview of the services that she provides to her customers, the value that she brings to their lives, and the success that her relationship approach to building her business has brought her over the past few years. At the end of her description of the business she told me her hourly rates – at least 50% of her nearest competition and 23% of the big national brands. It was her contention that by providing her services at this cut-rate price that she was increasing the value of her services even more and allowing her to win business that she might not otherwise earn.
While I respect her opinion and the success she has seen in her business so far, I respectfully disagree on both counts.
This woman clearly cares deeply for her customers, provides services of significantly higher quality than those of her competitors, and is willing to go the extra mile at any time to make sure that her clients are satisfied with their selection of her as a service provider. In a city with an average household income of around $90,000 and several competitors charging what I would consider very reasonable rates for their lower quality services this woman would clearly not be short of customers even with competitive rates. Her differentiating value over her competition comes from her relationship approach to her clients, her quality, and her dedication – not from any artificially low pricing she might be offering.
The problem is that the potential clients that would pay market rate for her services don’t believe that she provides a service of comparable quality and can’t see the relationship they might gain by hiring her because they see her pricing as too low. “You get what you pay for” is a pretty common mantra… so if you’re charging half of what the market demands what do you think the market expects to get from you in terms of quality?
The problem I believe is in the business of small business – Entrepreneurs are passionate individuals who bring significant value in their area of expertise, but many of them don’t have any experience in the business of business or in marketing and business development, so to compensate they believe that if they offer a low enough price they will gain more business. In some ways the problem is that they are right… smart consumers will recognize the discount when they see it and will buy more or use more of their offering which means that they have an opportunity to gain more business and work even harder – but they still aren’t making any more money.
I am a firm believer in doing the least amount of work to earn the maximum amount of money. That doesn’t mean that I’m lazy, but it does mean that I know when I am working in an area where I don’t have the expertise to be efficient or bring value without cutting prices (or working harder for the same money). If Entrepreneurs could see their own weaknesses and invest in them by using outside resources (marketing support, strategic development, bookkeeping, web-sites etc) rather than doing them themselves – effectively lowering their price and devaluing the rest of their services to their clients, they would soon find that they too were earning more even though they were doing less.
The fact that 94.6% of businesses in this country create only 24% of the GDP is not a sign that the big businesses are just bigger and therefore create more GDP value – it is a sign that we as small business owners are not working efficiently, focusing on our differentiating value, and are cutting our own prices rather than demonstrating our value. It represents an opportunity for small business owners to recognize their strengths, work with partners to deliver in the areas that they are weak, and to maximize the overall value of our offerings to take back our fair share of the pie.
Small business in Canada will be one of the biggest drivers of the economy over the next 5-10 years. The smart Entrepreneurs who maintain their market pricing and offer value and differentiation through quality and relationships will be the ones who find the most success over this period. If we all were to take that approach to the way that we do business I strongly believe that the gap between number of businesses and percentage of GDP would change significantly and quickly.
I’d love to hear your thoughts… do you read the statistics differently? Are you one of those businesses competing on price in a commodity market and you can’t see another way at it? What is it that you do in your business as the business owner that you know you don’t do particularly well (and why are you still doing it)? Feel free to share your thoughts in the comments below.
Tim Empringham, MBA
Tim Empringham is a passionate advocate for Innovation in organizations of all sizes as a mechanism to drive growth, create uncontested market space, create new customer value, and drive efficiency into the internal organization. His focus is on disruption of thinking and markets through integrative thinking, structured Innovation frameworks, and leadership development of Innovation and Change leaders within the organization.