How Are SMBs Doing Post COVID and What This Means for Your Commercial Book

In the U.S., three out of 10 small businesses believe they will not survive the coronavirus pandemic without additional government assistance, according to a survey from the Federal Reserve Bank, noted Khristopher J. Brooks for CBS News. Nine million small businesses are at risk of going out of business this year in the U.S., which is about 30 million firms.

In addition, minority-owned businesses face even worse prospects, with 8 in 10 stating that their business is not financially sound — even after receiving some help from Paycheck Protection Program (PPP) loans and other small business relief efforts during the pandemic.

According to Sam Myers, operations manager for the Black-owned moving company Dillard Movers of St. Paul, Minnesota, 2020 was a difficult year, and that 2021 is likely to be the same.

“We were at the brink of caving in and going out to find full-time jobs,” Myers told CBS News, referring to herself and her co-owner, James Dillard.

In March of last year, just as movers were gearing up to begin the busy season, the pandemic struck Dillard Movers hard. The company’s orders began picking up again in June, Myers noted, although “three months without income is a long time.” 

For business owners like Myers, these concerns were valid. Yelp’s September 2020 report shows that as of Aug. 31, some 163,735 businesses had closed. The figure is down from the 180,000 that closed during the first stages of the pandemic. However, since mid-July, the number of closures has increased by 23%.

Apart from monitoring closed businesses, Yelp also considers businesses whose closures have become permanent. 97,966 are closed-downs that are not going to reopen in the previous six months, representing 60% of closed businesses. 

“Overall, Yelp’s data shows that business closures have continued to rise with a 34% increase in permanent closures since our last report in mid-July,” Justin Norman, vice president of data science at Yelp, told CNBC.

 

“Despite the hard-hit small businesses have certainly taken, we’ve seen that home, local, professional and automotive services have been able to withstand the effects of the pandemic better than other industries,” Norman noted. In contrast, restaurants, bars, and nightclubs have been harder hit by the pandemic restrictions. As of Aug. 31, 32,109 restaurants had closed. The number of restaurants that have permanently closed is slightly higher than Yelp’s average of 61%. 

 

However, a Federal Reserve study published on April 16, 2021, found that the pandemic destroyed fewer businesses than initially feared. 

The COVID-19 pandemic may have resulted in fewer than 200,000 jobs lost during the first year, a loss that may have resulted in a relatively small drop in unemployment, research from the Federal Reserve shows

According to the early predictions, America’s “Main Street” would be desolate by the end of the pandemic. But polls show a continuation of worrying attitudes among large percentages of small business owners in the United States.

Researchers from the U.S. central bank estimate that 600,000 businesses fail every year, and that figure has likely increased from March 2020 to February this year, perhaps a quarter to a third higher.

Additionally, the Fed research group describes the fallout of the pandemic as the hardest hit sector being close-contact services such as barbershops and nail salons which accounted for 100,000 “excess” failures.

This is catastrophic for the owners and employees of those firms, “relative to popular discussion … our results may represent an optimistic update to views about pandemic-related business failure,” the authors wrote.

Despite the hit to services-oriented businesses, carryout restaurants, grocery stores, and outdoor recreation companies all fared better than normal, with the result being a smaller-than-anticipated blow to the overall economy.

“Many industries have likely seen lower-than-usual exit rates, and existing businesses do not appear to represent a large share of U.S. employment,” the researchers wrote.

How are SMBs Doing Post COVID?

The Small Business Administration estimates that over 627,000 new businesses open each year. However, before the COVID-19 pandemic, the number of new firms (employers) in the US had been steadily declining according to the Census Bureau dataset, Business Dynamics Statistics. This dataset tracks information on “a firm formation” of employment businesses among other things. Business applications that are likely to convert to actual businesses with payrolls are captured effectively using that form.

The creation of new employers was on a downward trend for a long time in the past, until the pandemic hit. In 2008 and 2009, the number of new businesses declined significantly and had not recovered to pre-recession levels. Between 2010 to 2018, the annual new business creation was roughly 14 percent lower than from 1978 to 2007.

The US Business Formation Statistics (BFS) shows that the number of applications for new businesses has steadily increased over the past decade. 

A total of 2.50 million new business applications were created in 2010. Despite this, 4.35 million applications were filed in 2020 according to new business statistics. This is an increase of 74 percent. In addition, it is the highest increase by far in the past decade by 24.13 percent.

Comparatively, the US government received 3.50 million new business applications in 2019, a reduction of roughly 11,000 applications from last year. Overall, the number of new business applications is up marginally 0.33 percent from the previous year.

What does this conflicting data show us? Well, firstly, when it comes to research, there are a variety of factors that can skew data points. Secondly, however, is that following turbulent economic conditions, there are potential business opportunities. 

For example, a working paper from the National Bureau of Economic Research published in June 2021 by John Haltiwanger, of the University of Maryland found that applications “for new businesses from the U.S. Census Bureau’s monthly and weekly Business Formation Statistics (BFS) fell substantially in the early stages of the pandemic but then surged in the second half of 2020. This surge has continued through May 2021. The pace of applications since mid-2020 is the highest on record (earliest data available is 2004). The large increase in applications is for both likely new employers and nonemployers.” 

Comparatively, applications for likely new employer businesses and in turn startup businesses of employer companies fell sharply and persistently during the Great Recession. Sector-specific growth in new business applications has been uneven. Approximately 75% of the surge is attributed to ten three-digit NAICS industries. A major contributor to the rise was Nonstore Retail (which currently accounts for 33% of the rise), Professional, Scientific, and Technical Services, and Truck Transportation. Since that retailers and hotels and restaurants have suffered especially large declines during the pandemic, these patterns are consistent with a restructuring caused by the pandemic.

Historically, when it comes to creating new businesses during recessions and recoveries, it’s been a mixed bag. 

 

On one hand, it may be difficult to obtain cash reserves, capital assets, or loans as financial institutions tighten their belts. On the other, if you’re laid off, you may have the time and motivation to start your business. Moreover, this climate can spur innovative business ideas. 

 

As a result of and despite the Coronavirus, more new businesses are being started. Approximately 67,160 applications were filed to form new companies in the US in the last week of May 2020, according to official figures.

 

Compared to the same period last year, that was an increase of 21%. This figure declined by 3.3% from 2018 to 2019.

 

Robert Fairlie, an economics professor at the University of California Santa Cruz, told the BBC that the latest increase is partly because more people start businesses when jobs are scarce, which he calls “necessity entrepreneurship.”

 

What Does This Mean for Your Commercial Book?

 

While times certainly have been trying, there is potential for SMBs in a post-COVID world. And, to help increase your chances of thriving, keep the following pointers in mind.

 

Grow your book of business when it is a shrinking market.

 

Because a market is shrinking doesn’t mean that you’ll experience shrinking profits as long as you position yourself correctly. To help you get there, here are some ideas worth exploring. 

 

• Be innovative. While this typically involves creating products or services to address the future needs of your customers, innovation is also about diversifying your portfolio. That means adding products and services to your existing offerings. 
• Adapt and pivot. You may have to completely switch gears to cater to current and future market conditions. For example, insurers could shift from product profit&loss to customer-centric P&L. 
• Improve the customer experience. Customers are demanding a better and more personalized customer experience. Some ways to achieve this would be viewing your business from your customer’s perspective, use analytics to make better decisions, and keeping them engaged. You can also use automation and artificial intelligence to supplement human connections. 
• Identify or create your niche. Become a leader in your industry. And, if that’s not possible, pave your path. 
• Explore new markets and sales channels. Consider marketing your products or services through new sales channels or entering new markets. 
• Step up your marketing and promotional game. If you want to stand out from your competitors, then find ways to make your voice heard. 
• Acquire or merge with another business. If you have the finances, consider merging or acquiring a competitor or company that sells complementary products or services. 

 

Improve efficiency in marketing.

 

The first step you need to take is to measure the success of your current marketing efforts. Marketers typically use gross profits divided by marketing expenses as a measure of efficiency and productivity. This ratio is flawed because it does not take into account many other factors. Economic fluctuations, demographic changes, and competitors’ marketing can all affect your marketing success. 

 

In addition, marketing is viewed as a homogeneous and consistent activity. The effectiveness of your marketing campaigns varies. The amount of marketing you increase cannot be proportionately increased along with the profits. When evaluating marketing success, you must take other variables into account.

 

Next, you should target your specific audience. 

 

Analyze which customer segments are most profitable for your business when creating your marketing strategies. You can reduce or eliminate your marketing for the segments that generate the least revenue for your business if you know who generates the most revenue. 

 

Your most valuable customers can be targeted with new promotions to increase your marketing efficiency and productivity. A faster decision-making process can also improve efficiency. The sooner you accept, modify or reject a new promotion, the faster you can roll it out — or get rid of it faster if it is ineffective.

 

And, finally, measure your results 

 

You must determine how you will measure success in your marketing, whether you are using traditional media or online. You should analyze your marketing regardless of how intuition or advertising agencies tell you. 

 

Whether you’re tracking leads, ads clicked online or inbound calls, you should consider creating a dashboard to summarize responses. Identify the ads that prompted the customer to act by cross-referencing them in your research. Google Analytics is a good tool for online analysis. You can find out who views your website, what they look at, and how often they return with this free tool.

 

Increase renewal rates.

 

At the same time, it’s often much cheaper to retain your existing customers than to obtain new ones. As such, you should improve your renewal rate as well.

 

As with making your marketing efforts, segment and analyze your database. However, you want to pay attention to churn rates. For example, are there certain milestones or time frames that people churn around in an engagement?

 

With that information in hand, you should next;

 

• Create playbooks that will provide your customers with extra support. 
• Improving processes, products, or services. 
• Having an easy renewal rate in place, such as reminding customers to update that out-of-date billing information. 

 

Review your book and verify all classifications.

 

“Many multiline regional carriers are looking to grow small commercial books of business due to concerns around personal lines profitability,” writes Chuck Ruzicka, Vice President of Research and Consulting at Novarica. “Strategic disruptors are targeting small and micro-segment commercial niches and leveraging new digital processes and analytics to compete against existing agent channels or provide faster access to markets.”

 

Small business is not without obstacles – there is an abundance of competitors in this field, and poor data availability makes it difficult to develop effective straight-through processing (STP), he adds. For small commercial insurers who are looking to expand their business, good agents and good staff relationships do not guarantee success. “To be successful, carriers considering state expansion or growth in the small commercial space need to establish competitive advantages in three areas: targeting a specific market segment, enabling high levels of STP throughput, and expanding digital capabilities to meet evolving consumer expectations.”

 

Ruzicka recommends to achieve this you;

 

• Segment the small commercial market, such as offering micro-coverage for Airbnb hosts or specializing in a subset of commercial opportunities.
• Develop high rates of STP throughout by simplifying “the user experience by eliminating questions and leveraging third-party data sources.” 
• Grow existing digital capabilities like online self-service or claims processing.