In 2011 Erik Hurst and Benjamin Wild Pugsley, two researchers at the University of Chicago, published a groundbreaking paper for the National Bureau of Economic Research examining entrepreneurial behavior among small business firms in the U.S.,
Using data from several sources, including U.S. Census data, the 2003 Survey of Small Business Finances, the Kauffman Firm Survey, the Dun & Bradstreet database, and the Panel Study of Entrepreneurial Dynamics II, Hurst and Pugsley’s findings were peculiar, perhaps even shocking, especially to those automatically equating entrepreneurial behavior with small business ownership. “The vast majority of small business owners do not expect to grow, report not wanting to grow, never expect to innovate along observable dimensions, and report not wanting to innovate along observable dimensions,” wrote the researchers.
The paper also failed to find much evidence of entrepreneurship among U.S. small business owners. “Only between 6 and 8 percent of new businesses reported that they had developed any proprietary business practices or technology during their first few years of business. Even conditional on survival five years later, 80 percent of firms still report not developing any proprietary technology, process, or procedure.”
Finally, the study looked at small business job growth and found very little evidence for it. For example, even for successful small businesses (those in existence for more than 20 years), only 9.1 percent reported adding any employees in the past calendar year (6.9 percent lost employees in that same time period, and the majority, 78.4 percent, reported no change in employment. “Even among very young firms,” the researchers wrote, “most firms do not grow by any meaningful amount.”
Why small businesses don’t grow
Several factors explain the no- or low-growth character of most U.S. small businesses. First among them is the personal motivation of the small business owner. While respondents mentioned “income” as an important reason for starting a business, “the most common response for why individuals were starting their own businesses was the existence of non-pecuniary benefits. Individuals reported that they liked being their own boss and like the flexibility that small business ownership provided.” Obviously, non-pecuniary motivations are distinct from those held by entrepreneurs and empire-builders seeking to leverage and scale their business operations in order to become the next Google or Microsoft. “Only a fraction of firms start because they have a good business reason,” wrote the researchers.
Secondly, is it not likely that many small businesses could grow, even if they wanted to. Most small businesses “are concentrated in a small number of 4-digit NAICS industries that mostly provide standard services to local customers.” These industries consist of restaurants, skilled professionals, professional service providers, general service providers, or small retailers. Consequently, the potential servable markets for these firms are often circumscribed by geography, fixed demand, or by the very nature of the business itself: “Many small businesses are dentists, plumbers, real estate and insurance agents, small shop keepers and beauticians,” the researchers wrote. “Within these industries, the productivity of the firm is directly linked to the individual’s skill set. Given the fixed costs of production may be small relative to the variable costs, optimal firm size may be quite small.”
Implications for marketers
Both the psychological profile and market reality of a small business owner are very different from those of a typical “grow big/grow fast” entrepreneur. Consequently, marketers may need to take a second look at the way they pitch their messages to small business owners. For example, pitches based on the “grow big/grow fast” idea will likely not resonate with the majority of these people, whose economic goals are modest, potential market reach is constrained, and who, for better or worse, seem perfectly happy to “stay where they are.”
On the other hand, “efficiency” (do more with less) pitches, however, may find a more welcome audience among these people, given that time is a scarce and non-replenishable commodity for all humans. And given that personal autonomy is clearly a driving factor in the decision to form a small business, appealing to the innate desire of the business owner live a freer, more autonomous life, or appealing to other “non-pecuniary” motivations may provide a more profitable strategy when tailoring messages and campaigns for these individuals.