How Small Businesses are Using AI with Greg Sterling of Dialog | builders podcast

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0:15Today, I speak with Greg Sterling. He's the co-founder of Dialog, which is a research and advisory firm about how AI is changing the local market for small business. Greg's been researching digital transformation in small business since the late 90s. covering three different phases. The first phase might be thought of as websites and the adoption of broadband internet by Americans. The second phase might be thought of as mobile and smartphones and the mobile web. And now this third phase of AI. And we talk about how small businesses are adapting to it and might be better poised to take advantage of AI than even enterprises.

1:02All right, we're talking about small businesses in America with Greg Sterling today. Hi, Greg, how are you? I'm good. How are you, John? I'm good. It's great to see you. And I was remarking before we got on air that I hadn't looked at small business statistics in a while, and I've kind of blown away by some of these numbers. More than 30 million small businesses in the U.S. They employ 60 million Americans, almost half of all private sector jobs. It's a really dynamic part of our economy. You've been studying small businesses for a long time. Maybe you can tell me first how you started doing that when you started studying small businesses and how you do that.

1:41And then also, what is a small business today? I think it's a little bit different than how we all thought about the local coffee shop or restaurant. Yeah. So there's a bunch of questions in there. Let me start with how long I've been doing this. And so I first got involved with small business, this sort of small business sector in roughly 1998. This is a much longer story that I want to get into. I went from being a lawyer who was very unhappy to moving into different Internet companies in different capacities, mostly at first in an editorial role. and I worked for a company called allbusiness.com in 1998, which was an early portal that was trying to provide content and education for small business owners about the nascent internet in an effort to aggregate a massive audience and then sell S blank blank T to them, you know?

2:35Right. And it was kind of ahead of its time. And I, you know, I did a lot of stuff for them. And that was sort of my first, well, actually before that I had another role, but basically since 1998, in one form or another, I've been looking at the small business segment, not exclusively, but that's been a large part of my work over time. And that involves, you know, quantitative research surveys and interviews and looking at lots of data from lots of different sources, government sources, and just being in the world and talking to a lot of companies that try and sell to small businesses, which is a lot of folks.

3:10And people see that 30 million plus number, whatever the actual number is. And there's always a lot of debate about what's the real opportunity, what's the real market size. And they're very excited about that. Everybody's got some slide in their pitch deck that says, oh, there are 30 million small businesses. If we capture X percent of this market, our revenues will be Y. And it's a very, very difficult segment to crack. Now, to the definition of small business, the US government, the Small Business Administration will define small businesses as one to 499 people. But of course, there's a massive difference between a company that has 500 employees and a so-called solopreneur, right?

3:54Or even a company that has 20 employees. So realistically, small businesses are one to about 100 headcount. And even within that range, you've got significant, significant differences in terms of sophistication, resources, you know, capabilities, capacity. But it's really the one to 100 segment that is kind of the traditional small business. And then people like to sort of subdivide it into very small, medium and large small businesses, you know, with one to 10 being the very small business segment. And that's where the bulk of the volume is. If you look at the distribution, the absolute numbers are concentrated in the very low end.

4:37So fewer than 10 employees. And you yourself are a small business owner, you know, owning a research and advisory firm. And you were talking about how easy, maybe easy is not the right word, but how quickly you can get a new venture up and running, which probably is one of the reasons why there's so much activity in this space. Right. There's an enormous number of new business formations every year, millions of new businesses formed. And some of those are viable and serious. And some of them are sort of ideas, concepts that don't really ever get off the ground. Yeah, I've got two things going right now, two LLCs.

5:09I've got a thing called Near Media, which is a content site, but also a research initiative around search, the search marketplace and search user testing. And then another separate thing going called Dialog with a colleague, Neil Palachuk, whom I worked with a long, long time ago in the early 2000s in a research firm that was looking at Yellow Pages, the Yellow Pages industry and its potential disruption. In one case, there are three people. And in this other case, Dialogue, there are two. There's me and then my colleague, Neil. And there's just a lot of software that exists that helps take the friction out of forming a business.

5:53We used Zen Business to get our LLC off the ground. We're using ChatGPT. We're using other software for the website and various other things. So there's a lot of resources now for entrepreneurs to put together a function business with very few personnel. And this is one of the things that people talk about with with AI is that, you know, where it once might have taken X number of people to do something. It's now going to take many fewer people to accomplish the same thing. And this is, I think, a fundamental shift in the market is that it's just going to take fewer resources to get things going and maybe to be competitive with some of the larger companies out there, depending on what you're doing.

6:36And I want to ask you about your research on small business and their adoption, excitement, fear, et cetera, as it relates to AI. But before I do, I sort of want to ask about how your own research has changed. When you did your first surveys or research on the small business market 20 years ago, 25 years ago, what did you do? And now what are you doing to get information back from small businesses? Well, you mean the mechanics of the research or the content of the surveys? Yeah, the mechanics. Yeah. Well, back in those days, you know, there was there was some amount of telephone research going on.

7:13I didn't personally get involved with that. But I mean, certainly in political context, there was a lot of phone based research going on and customer satisfaction research over the phone. It quickly migrated online for cost reasons. And there was a time when if you were doing online only research, you weren't necessarily capturing the whole audience because there were pockets of people that were offline and younger people were online. And so your results were being sort of skewed by that. And that's no longer true. Everybody's online. So everything is now online. Mechanically, it hasn't changed that much for me, although it's cheaper to do research today.

7:48I mean, before when you when you did research, there were third party firms that had that, you know, you went to even if you were generating a survey yourself, you went to third party firms that could then source the respondents. Right. So you were looking for for small businesses. You were looking for teenagers. You were looking for, you know, people who didn't have jobs, whatever your population that you were trying to pursue, you know, people who had smartphones, whatever it was. And you would go to a third party and they would and they would source that for you. And that's still largely true, but the costs have come way down from what they were.

8:24So you can you can do certain kinds of research, consumer research in particular, very cheaply. It's more expensive to do small business research. It's more expensive to do to get certain kinds of specialized populations. But it's it's become cheaper. It's all online. And the turnaround times are tend to be quicker. And the analysis now is much faster. So, for example, we're using ChatGPT to do a lot of spreadsheet analysis that previously you had to do pivot tables and other things that were complicated and labor intensive. Although people, yeah, I'm not good at pivot tables. So somebody who loves pivot tables might take issue with that.

9:05What do you mean? But we can do a ton of things with ChatGPT now and lots of segmentations that are very specific that were just very labor intensive to do. So what you can do now is faster, cheaper, and in many ways more capable than what's happened before or what was going on before. You're a newly formed small business. You're embracing AI. And I think when we were talking before, this sort of onset of AI might be called the third phase or third wave of digital transformation for small businesses. For sure. Let's rewind before talking about AI. Let's talk through the first two and kind of like what were the major challenges that businesses had.

9:53So the first one, I guess, would have been the onset of the Internet and consumer expectations that they could find what they want via websites. Is that fair to say? Yeah, for sure. I mean, the internet kind of came into being, depending on how we, I don't have a timeline in front of me, but it took a period of years, right? First, there was sort of rudimentary web presence and directories and the Yahoo directory and DMOS and all these things where information was being aggregated. And there was this kind of novelty about the internet. And it was not seen by most businesses as a serious thing, as a commercial thing.

10:36And then that changed over time, obviously. And then it became important to have a website. And then websites became more sophisticated. Broadband adoption was a big deal. So we didn't have, you know, there weren't smartphones. Most people had dial-up in the beginning. Remember all the disks that AOL sent out? You know, there were just all these disks everywhere. and you can remember, of course, the sound, the horrible sound of the dial-up, you know, you know, and you waited and you waited and it got on and things took a long time and it was very slow. And this is, this is where Black, where Cyber Monday came from, right?

11:11The idea was that you got back to work on Monday and you used a fast connection to do your e-commerce shopping, but it was all very kludgy and slow and difficult. And, and it took years for broadband to reach critical mass and consumers to start really using the internet as a fundamental resource. And in those days, you had to convince small businesses that it was worth their time to be online and to invest time and energy and resources into being online. And there was an enormous amount of skepticism for a long time because they were using traditional media or they had word of mouth or whatever the marketing channels, direct mail that they were using.

11:48And those were working fine for them. The Yellow Pages, newspapers, those were working fine for them for quite a long time. Until those audiences really started to erode and migrate online. And then you had this fragmentation of audiences. And you had to do a lot of education. Here's why you need to be online. Here's what your customers are doing. And that was a many-year process. Maybe over a decade, depending on when we started. Yeah, I think that's for sure. Because let's say you're the local auto repair shop. And you get 80 % of your business from word of mouth or drive-bys or something like that.

12:24You might not see year over year that your new business is shrinking because people are finding your competitors elsewhere. And there's a lot of trying to messaging to small businesses, almost like fear-based. You're going to be left behind. Oh, it was totally fear-based. It was totally fear-based, right? I mean, because fear is a very successful motivator. And so there was a lot of like, you better be online because your competitors are. And here's what your customers are doing. And if you don't, you're going to be. I mean, now some of that stuff is happening around AI. But it was very much a fear-based kind of campaign by a lot of these companies that wanted to acquire small business customers, for sure.

13:01You know, after that decade, decade plus, and most businesses had a website and the website wasn't terrible and all that stuff, people could find it. Then, you know, we all started getting iPhones or other smartphones. 2007 is when that all kicked in. Yeah, and that kind of changed the game again. How would you characterize how small businesses reacted to that versus reacting to that first phase, you know, late 90s, early 2000s? Well, so let me first tell a digress and tell a quick story and then I'll then I'll answer that question. So in the very early days of Google AdWords, which was then called as opposed to Google Ads today, you know, I attended what they called Google U, like Google University, Google U.

13:49And these were sessions where they were teaching mostly small business owners how to use Google AdWords. And I remember seeing Sheryl Sandberg, who subsequently became COO of Facebook, Meta, but was also a successful executive at Google, speaking to this audience that I was in. And I was an analyst at that time, and I was sort of in the audience just to see what was going on, about how Google AdWords were directional marketing, directional advertising, just like the Yellow Pages. And she was explaining Google AdWords in terms of the Yellow Pages so these business owners could understand, you know, by example, what this was.

14:27And that was, you know, that was back in the early 2000s. Then after the iPhone was introduced and the App Store and all of that happened in 2007 and beyond, you had a kind of similar situation to what occurred when the Internet was rolling out over a period of time. But it was a little bit more accelerated because all these business owners sort of knew why they were online, what was important about the Internet, digital technology, digital marketing. The deal now was you had to have a mobile, you know, either an app or a mobile responsive design website. And in the beginning, everybody was building apps.

15:02You know, you had every small business was being pitched on an app. And of course, it became clear over time that nobody was going to download your little small business app. And that wasn't going to really help you very much. So you didn't really need an app unless you were really serious, had a brand, had some kind of functionality that the mobile web couldn't accommodate. And so everybody, you know, then these website developers, website building, website creators became default mobile responsive. So, you know, it was like you had to educate these business owners in the same way, but it wasn't quite as significant a lift.

15:38And then eventually all the big web builders created these responsive sites for you. And so it rendered on a mobile device or, you know, or desktop. And that took a few years to kick in. So let's call that period, you know, 2007 to 2011, 12, maybe, you know, sort of shorter by half. How did small businesses react to them compared to enterprises? Did you have any research or insights into that? Were enterprises faster to move into the internet or mobile web? Were small businesses sort of being left behind? Were they moving faster? This is a high level of generality, but I would say in general, enterprises were embracing these digital tools and digital technology much more quickly than small businesses.

16:33Enterprises have their own challenges. They're bureaucratic. They're many layered. There's a lot of compliance issues. There's lots of stakeholders. But on the whole, they did everything much more quickly than small businesses, even though small businesses, in theory, there's less friction with them. But small businesses had to be convinced of the efficacy or the need to do whatever the thing was, to have a web presence, to have a mobile site, to do e-commerce, whatever. They had to be brought along by thought leaders and experts and others who were telling them, you need to do this and here's why.

17:08Whereas enterprises, for the most part, saw the need to do these things and it was kind of self-evident and they had the resources to do them much more rapidly. And also feels like enterprises, when it comes to these two changes, these two phases had enough scale or scale was really important about having a great website or a great app or anything like that. And as we move into discussing this third phase of AI, it almost feels like things have flipped where scale isn't really necessary to use or purchase AI tools. And so I'm really curious how, well, first of all, how would you describe this third phase?

17:54Is AI a third phase? How would you describe it? And then what have you seen through your research about how small businesses are reacting? What we say in our sort of overview deck is that it's the real Web 3.0. You know, the Bitcoin and AR and VR were sort of floated as this is Web 3.0. But this is really the Web 3.0 because, you know, you have the Internet, you have mobile and you have this. This is a very significant, overarching, transformative change. You know, people talk about to what degree AI is being hyped and, you know, are we in an AI bubble and all that? But this is make no mistake, this is a very profound change that will touch all areas of the economy and most people's lives in one form or another.

18:39So I think it's at that level of significance, at least as important as mobile. What you point out by implication, I think, is important and relevant to the discussion of how why AI is different. So with the web and with mobile, really, we were mostly talking about marketing, digital presence and marketing outreach. And that was really about distribution and scale, which is why companies like Google and Facebook won, because they had the scale. AI is not really about distribution. It's supportive of distribution, but it's about much more. It's a much more flexible and encompassing kind of tool.

19:25You can use it for a lot of things. People are starting out with marketing, but it can be used for product development. It can be used for, you know, HR. It can be used for training. It can be used for business insights. It can be used for operational purposes. And so it's a much broader tool in one sense. And then I would say that the fundamental difference that we've observed in our research versus these historical examples of the Internet and mobile is that small businesses know about AI. There's very, very high level of awareness. I would say it's 90 plus percent in the United States. And many of them have embraced it.

20:10And they've done that on their own in a way that is kind of unprecedented in a sort of DIY approach that is really different from what has happened in the past, where people had to be pulled, kicking and screaming or scared into using something. These people are enthusiastically embracing these tools. Now, they don't know how to use them completely. I mean, they're discovering use cases and they are using them for certain things, but not other things. So they don't know everything there is to know, and they're not experts, but they are embracing them enthusiastically, and they recognize instinctively that this is a tool for efficiency and cost savings and improving their businesses in multiple ways.

20:52So they get it. They get it, and they're embracing it. And the enterprises, by comparison, are slower. They're all talking about it. And the McKinsey's of the world are out there saying, you know, and the Deloitte's of the world are issuing report after report talking about enterprise use cases and why enterprises need to do this. But on balance, enterprises are finding it harder than small businesses, which have less friction and fewer barriers and fewer lawyers to say, don't do this. And they don't think about privacy and they don't think about compliance. They're just thinking about how can I use this thing to write a better email?

21:27How can I use this thing to create a better experience for my customer? Yeah, it is interesting that the bureaucracy of the enterprise, you could sort of get past that when it came to purchasing a web hosting service or something like that, because you maybe had an IT department that could just get it done. But in the small business use case, now all of these people who own small businesses for the last 20 years know how to sign up for something online. They know how to interact with a search engine, are comfortable with online tools. And these things are just so just so easy to use. And a lot of things that small businesses, I think, need to do is be really efficient with their operations.

22:06And so this is a very natural thing. I don't need to hire a marketing consultant. I don't need to do X, Y, Z. It's something that sort of maybe a pain in the ass for me that this has made made it a lot easier. And the the adoption metrics are kind of are kind of out out of this world. Different research firms have different numbers and we do too, but we're really kind of approaching 40 % of small businesses with sample sizes of 1 ,000 and then 1 ,500, 2 ,000 businesses that you can kind of extrapolate to the larger market. You know, almost 40 % of small businesses are using AI or say that they're using AI in some form or another.

22:46And then there's a larger group, a second group that makes it a larger whole that's testing or experimenting. So you're north of 50 % of small businesses in the United States that have played with these things or are using them on a regular basis, and they're discovering new things all the time on their own. And they're sort of using whatever information is available to learn how to do this. Whereas before, you had a lot of sellers that were out there sort of educating business owners. Here's how you use this, or here's why you need to use this. There's less of that now, interestingly, it seems to me.

23:19I mean, there are people doing these AI webinars, but there isn't a sort of a place where people can go, where small business owners can go, a single place to get information. And you're absolutely right that what they're doing today has built on everything that has come before. And something like ChatGPT is very intuitive. It's very much like Google. You know, it's a box and you can put stuff in it and it'll respond to you. And the difference is that it gives you a lot more context and it gives you, you know, gives you more complete information and it will interact with you. It'll give you a kind of conversational response.

23:53And so you can say, how do I use you to do X? I need to do this. Can I use you to do this thing that I'm trying to accomplish? And it will tell you, yes, you know, you need to do these things or here's a prompt that you can use. So there's a kind of self-teaching element that is available that wasn't available with some of these other tools as readily. Yeah, well, even when you think about the first time you try to do your taxes online or the first time you sort of renewed a driver's license online or whatever, there's still this learning curve that you'd have to do and you have to set up the account.

24:27You have to process what you're doing, whatever. There's like no learning curve. Or it's very limited. It's very limited. Yeah. Let me flip this around to talk about the companies that are trying to sell to SMBs, whether it's an AI product or something else, because we've kind of been hitting on that. You've been using it. You use Zen Business or you use this website development product. For companies that are trying to sell to SMBs, what advice would you give them in sort of this day and age? You're talking about outside of the context of any AI capability. You're just speaking in general, right?

25:03Yep. I think that one of the fundamental challenges in the market is that there are so many different quote unquote solutions. There's a lot of noise. There's a lot of competing products that all sort of seem the same or similar to one another. It's very hard for people to differentiate and very few brands. There are a handful of brands. People know MailChimp. People know Constant Contact. People know Salesforce. There's a HubSpot. There's a few brands. But most people are looking at 10 different solutions or seven different solutions, and they seem to be the same. And it's very hard to differentiate.

25:39So the challenge for companies is to differentiate and also to establish trust. Trust is a very scarce commodity in the market these days, especially. You know, there's so much sort of fake information and sketchy scams and sketchy stuff. And the advice I would give, and this is not going to be satisfying, is really to try and build a brand over time, you know, deliver a great experience, product and service, you know, make a product that really works and really solves a problem, support that product, make human support available. I mean, a lot of companies are sort of trying to outsource support in one form or another to chatbots that are sort of underpowered or offshore call centers or whatever.