Small Businesses and Small Cap Stocks Have an Inherent Structural Flaw- by NEIL SISKIND
No Pricing Power in the Internet age.
Large companies and small businesses get new business, primarily, in the same way (aside from direct proposals)- from the Internet.
Customers (businesses and individuals) shop based on price.
Large companies can offer lower prices, and can advertise those lower prices and advertise to get phone calls from people seeking lower prices in a bigger way than can small businesses.
Large companies can use low prices as loss-leaders to outbid their respective competition.
As long as customers can find all potential sources of products in one place – the Internet- then small businesses will have difficulty landing new customers or expanding their margins with existing customers.
The more advanced and sophisticated shipping gets, the less that geography and convenience will matter.
As for business services, the larger companies will benefit from scale to lower labor costs and win business.
When geography and service matter less than cost, when the Internet offers customers access to all available competitors offerings and prices, equally, and when the Internet removes proximity of a company to its customers from the equation, a small business (and a small cap stock) can never gain market share, and can never raise prices- even as its costs rise.
The Internet creates a structural condition which is a structural flaw in small businesses (and small cap stocks). They can’t lower prices low enough to compete with companies that have scale and economies of scale, and they can’t raise their prices high enough to cover rising costs. This is why you often hear small companies tout their higher level of service. But that is, often, not enough to survive- and it costs a lot of money to provide better service by paying more money to the labor that has to provide that better service, while losing time to make more sales. Better service for the same dollar of revenues as a larger company makes is no long-term survival strategy- and is surely no valid long-term growth strategy. In fact, larger companies, ultimately, by virtue of scaling with low prices, end-up in a good position to increase service levels and take away the only advantage that remained for their smaller competitors.