Those who know the SMB market know it to be full of barriers. Those who don’t know it often enter with wide-eyed optimism at the sheer size of its addressable market… then run into a brick wall. One issue is fragmentation: The revenue opportunity is siloed into millions of SMB verticals or buckets.
An offshoot of that fragmentation is what I’ll call vertical variability. Hundreds of verticals or – “headings” in old-school YP terms – have their own nuanced proclivities. Like a veterinarian who deals with anatomical vagaries from squirrels to sheep, SMB SaaS vendors need a wide intellectual range.
Beyond buying habits, pain points, and even regulatory requirements that span this range, there are financial attributes specific to certain verticals. Retail shops have different cash flow challenges than dentists and dog groomers, given the financial burdens and strategic particulars of physical inventory.
Another financial variable is profit margin. This re-emerged on our radar screens when coming across a sort of public service announcement from DoorDash. As part of its broader content marketing and market education effort, it published a telling analysis of profit margin variability across SMB verticals.
Marginal Difference
To sum up DoorDash’s findings, here are a few figures we pulled out of the report. And for the sake of definitions, what DoorDash is measuring here is net profit margin, rather than figures further up the P&L, such as gross margin and EBITDA, that are often used to convey operational performance.
What’s a good profit margin?
Of course, it varies widely as shown below, but if one were to pull out an average, it would be 7-10 percent, says DoorDash.
What are average profit margins by SMB Verticals?
Restaurants: The overall category has a wide range, from 0-15 percent. That includes full-service restaurants at the low end (3-5 percent), and ghost kitchens and pizzerias at the higher end (up to 15 percent).
Liquor stores: Liquor stores are a bit higher at 15-20 percent on average. This is owed to inherently high markups, low inventory spoilage, and – let’s face it – a demand-proof all-season product.
Pet stores: This varies widely based on independent versus economies-of-scale advantaged multi-location brands. The presence of pet supplies also impacts margins. For reference, a Pet Supplies Plus franchise will see margins around 7 percent.
Grocery stores: Grocery stores are known for thin margins, around 1-3 percent. That will vary, like pet stores, based on independent versus franchise affiliation. Specialty grocers also have higher margins based on their luxury-tax-like premiums. Either way, this is a low-margin / high-volume play.
Convenience stores: Convenience stores are slightly higher than grocery stores at about 5 percent. Chains like 7-Eleven can achieve as high as 10 percent. Fluctuations hinge mostly on overhead like rent, which of course is location-dependent.
Flower shops: Flower shop margins are highest on this list at 20 percent. This is mostly due to market-tolerated markups in the category. Think of it like the inverse of grocery stores in that it’s a high-margin / low-volume play.
Hundreds of Headings
Of course, the above is just a representative sample. Again, the SMB universe has hundreds of headings. Regardless, the question that emerges from all the above is how can SMBs improve margins? Another way to state that question for the Localogyverse is how can SMB SaaS players help them do so.
DoorDash recommends several tactics, some more obvious than others. Here are a few of the better ones that we plucked out and reframed…
Audit individual item performance: Run quarterly product audits. If it’s too cumbersome to do every SKU, a product-category analysis can at least bring some insights to light, such as paring back underperforming inventory.
Get Social: Under the umbrella of brand building, have a voice on social media to connect with the community. This should be a mix of planned and spontaneous content that comes across with a genuine voice (see our TikTok SMB showdown). If you aren’t socially savvy, find a digital-native nephew or intern.
Launch online ordering (if applicable): Whether it’s curbside pickup or full-fledged eCommerce, online shopping increases SMB surface area and scales operations beyond a city block. These sales can also carry higher margins because they consume fewer business resources and physical interaction. And supporting platforms are plentiful.
Create item bundles: One way to improve margins is via ARPU. If you can boost basket sizes through bundles that feel natural, it could achieve that. Using one of the examples above, liquor stores can create bundles for endemic or festive cocktails around holidays, with all the ingredients and mixers brought together for a package deal.
Active and passive upselling: Similar to bundling, staff can be trained to always look for opportunities to upsell customers. This can be friendly suggestions when a customer is checking out, or point-of-sale signage that does similar. This also includes classic tactics like low-stakes magazines and candy near the register…
