15 min read10 April 1925
iwoca put the public’s support of small businesses to the test in a one-of-a-kind psychological experiment.10 April 1925
If Joe or Jane Bloggs in the street was asked who they’d rather see do well, a local independent shop or a nearby chain store, you’d expect them to back the little guy almost every time. After all, Britain loves an underdog.
If they backed the small business, their choice could reflect a genuine affection for independent companies. On the other hand, they might have fallen foul of social desirability bias – an unconscious psychological tendency that pressures people to answer questions in a way that’s viewed favourably by others. In reality, when faced with a choice between a small business and a national chain in the cold light of a busy Saturday, the benefits of supporting the small business could be the last thing on their mind.
To explore whether Brits really care deep down about small businesses, iwoca, a business finance company, ran a two-part experiment with 1,300 people. In part one, they were asked how they felt after reading a number of fictitious but believable news stories about businesses in their area. In part two, they were asked whether they’d choose the small business or a large company when faced with a like-for-like purchasing decision.
iwoca’s researchers created seven fictitious news stories, each describing a different scenario in which one or more local businesses experienced a positive or negative event. Half the time, the news stories featured small businesses, and half the time, they were about large companies. Crucially, test-takers had no idea they’d been randomly shown the small or big business version of the stories. This way, their real attitudes towards the successes and struggles of small businesses could be analysed without explicitly asking them if they favoured small businesses over larger companies.
Test subjects were asked to imagine that the stories related to their local community and to rate how each one made them feel. Across seven news stories, they reported their levels of sympathy, positivity, disappointment and respect.
After reading version A of the story (featuring large chain stores) or version B (small businesses), people were asked how sympathetic they felt towards the affected businesses from 0 (not sympathetic at all) to 100 (extremely sympathetic).
On average, small businesses received significantly more sympathy for the disruption in trade (71.9) than the large chain stores (54.7).
The most common justification provided was that chain stores could financially withstand the disruption, whereas, in the words of one person:
‘Small businesses already have a hard enough time getting customers compared to larger retailers.’
Where people gave high sympathy ratings in the large chain store scenario, their compassion was mainly directed towards local residents, not the businesses themselves:
‘The shoppers will be very disappointed …’
A few people did have something to say about the large companies and didn’t mince their words. For example:
‘Chain stores take business away from local shops, so this is a taste of their own medicine!’
The situation in this story is similar to the roadworks one above – an event beyond businesses’ control disrupts their trade. However, in this scenario, the focus is on the employees, not the businesses.
iwoca’s theory was that people would give higher sympathy ratings when thinking about the plight of individuals instead of corporate entities. This proved correct, as both stories received high average sympathy ratings. The small business version was slightly higher (79.4 vs. 77.5), but there wasn’t a statistically significant difference between the two scores.
So when considering the plights of large chain stores versus small businesses, the public is more sympathetic towards the latter. But when thinking about the unfortunate employees of both business types, they are equally compassionate.
Nearly 3,000 shops shut on UK high streets in the first half of 2019, which means ‘Closing Down’ signs are a common sight to many. In this story, a cosmetics store was reported to be shutting up shop after almost 20 years. In one version, it was a well-known brand, while in the other, it was an independent small business.
On average, people were 25% more disappointed to hear that the independent store was closing compared to the well-known chain (66.5 vs. 53.2). When people did feel bad for the chain store, support was once more largely for nearby residents and staff, although a number of people said the closure could be a sign of local economic decline or that online shopping might be to blame.
Others took a very pragmatic position on the cause of the closure in both versions of the story:
About the retail chain: ‘It wasn’t “forced” to close – it lost customers because it didn’t keep them happy, and they have shopped elsewhere.’
About the small business: ‘It’s a shame because it’s been open so long, but if it can’t compete with the new competition (likely online), then it shows an efficiency problem.’
About the small business: ‘I do feel sympathetic that someone may lose their livelihood; however, nobody is forced to use a certain retailer. It’s up to the retailer to attract customers by any means, be it lower prices or finding new revenue streams.’
This scenario, in which websites belonging to small or big businesses are defaced by hackers, is based on a real cyberattack that affected hundreds of sites in 2017, including many belonging to small British businesses.
Unlike the stories so far, this scenario didn’t focus on brick-and-mortar stores. The affected businesses included online retailers to whom the public could, in theory, have felt less attached because they weren’t physically on their high street.
However, this scenario actually showed the biggest difference among the seven we tested. The small businesses whose sites were hacked received 37.2% more sympathy than the large companies.
At their most charitable, people thought the big businesses should have done more to secure their sites, given their considerable resources. At their least, they questioned whether there might have been a good reason that the large companies were targeted.
‘I do feel a bit sorry for them, but it makes you wonder why these companies were chosen by the hackers.’
Whereas, the general sentiment towards small businesses was far more sympathetic and less suspicious.
‘Small businesses face enough pressures without being targeted by criminals.’
‘No sympathy for idiots who commit cybercrime. For a lot of small businesses, their website is their shop window.’
In three of the four negative stories, the public showed more support for small businesses than large companies. But do we only get up in arms on behalf of the underdog when it’s bad news, or are we just as likely to feel warm and fuzzy about small businesses when they’re mentioned in a feel-good story?
This scenario is one of three positive stories we tested. A pizza restaurant, either owned by a chain or independently by two friends, is celebrating its 20-year birthday by inviting some opening-day diners back as special guests.
There were a lot of positive remarks about both versions of the story. Many thought that a local company that’s survived for 20 years was ‘good to see’ and a ‘feel-good story,’ whether it’s part of a chain or a small business.
On average, people felt significantly more positive about the independent restaurant’s success (75.4 vs. 60.9). Interestingly, when the large business version received high ratings, the focus was typically on the jobs the business had sustained and its implied offer of a free meal to past customers. In the small business version, much more often, people focused on the success of the business owners (while still acknowledging the kind gesture). For example:
‘Nice to see independent business success in an increasingly chain-led market. The owners obviously appreciate their customers, hence staying in touch with some of their first diners.’
On average, people also showed significantly more positivity when reading about the opening of an independent doughnut shop by a local chef compared to a new branch of a well-known chain of doughnut stores.
In both cases, some people shook their heads at the arrival of the unhealthy snacks:
‘Glazed doughnuts? For goodness’ sake – obesity crisis or what?’
But others saw a silver lining in the doughnut’s glazing:
‘It’s good to see new independent ventures rather than more empty shops, charity shops and nail bars.’
‘It’s a good opportunity to get local people involved in the store’s opening and inform them of the new business. Winning doughnuts would be a definite plus!’
In our final fake news story, a car servicing and repair company makes headlines for pledging 5% of its profits to benefit the local community. Both the large company and the small business received high average scores, this time based on how respectable their charitable act appeared to readers, but the small business’s average was significantly higher than the large company (78.9 vs. 72.8).
A lot of people were complimentary towards the large company’s kind gesture (it wouldn’t have received such a high score if they weren’t), but many people’s explanations were tinged with cynicism about the company’s underlying motive.
In fact, people mentioned the possibility of the charitable act being a PR stunt, advertising gimmick or example of virtue signalling 1.8 times more often for the larger company than the small business (11.3% of rating explanations vs. 6.3%), despite the fact that each company pledged the same proportion of their profits to the same cause for the same reason.
People showed significantly more emotional support for small businesses in six of the seven dummy news scenarios we tested. They felt more positive when small businesses did well, were more sympathetic and disappointed when they struggled and were more respectful of their generosity towards the local community.
But businesses can’t pay their bills using emotional support. For the public’s backing to mean something, it needs to translate to sales. That means consumers at least sometimes choosing the small business instead of a large competitor.
To see how far the public is willing to go to support small businesses, we asked over 600 people who they’d give their money to in two scenarios. In the first, they were asked to imagine they needed a new iron. They could either buy it from a large local retailer for £20 or from a small local business for a different price.
The small business’s price varied according to which group individuals were randomly assigned. Some saw an identical price (£20), and others were shown a higher price (e.g., £21) – and in some cases, significantly higher (e.g., £35). By showing different prices for the iron sold by the small business to distinct groups of people and keeping the price offered by the large retailer the same for all, we found the tipping point where the majority of Brits switched from buying from the small business to the large retailer.
When faced with the choice of buying the same product from a small local business or a large national retailer, with both stores equally easy to buy from, 72.4% of people chose the small business. Although it’s a majority, that means 27.6% chose the larger retailer instead of supporting the small business, even though they knew the product and price at both shops were identical. Most people who fell into this group said they worried they wouldn’t be able to return the item if the small business went under, whereas the large retailer would stand a better chance of staying afloat.
When the product was just £1 more expensive at the small business, the majority (67.6%) chose the large retailer instead. While it could be expected that increasingly fewer people chose the small business as the price difference ratcheted up in favour of the large retailer, the tipping point was reached remarkably quickly.
When the price was £5 higher at the small business (+25%), only 1 in 6 people chose the independent retailer, dropping to 1 in 17 when the price difference was £10 (+50%). For most people, a higher price for the same product was simply too much to bear.
‘It’s all to do with the price. Although I’d ideally like to support the independent store, I would have to opt for the slightly cheaper price, as I have a very tight budget.’
‘If the price were the same, then I’d choose the independent shop. But, ultimately, I care more about my own financial well-being than theirs, and I can’t afford to spend more than I have to on an item.’
The second buying decision we asked people to make was on a boiler repair. They could choose an engineer from a national company or a small business, with the knowledge that they were equally qualified and available for a callout.
The repair by the national company cost £150, but, as in the iron scenario, the small business’s price varied. Some people saw the same price, while others were shown incrementally higher prices.
As in the iron scenario, when the price was the same, the majority of people (77.8%) chose the small business as opposed to the large company, reflecting the support for small businesses we saw in the dummy news scenarios. But when the small business price was slightly higher (£20 or 13.3%, compared to 5% in the iron scenario), the majority (53.9%) chose the large national company.
The fact that significant proportions of the public chose the large companies over the small businesses even when their prices were identical suggests that not everyone unconditionally backs small businesses. And when a relatively small cost is placed on them (around a 10% price difference), customers turn away from small businesses in large numbers.
The news story sentiment tests suggest that Brits do favour small businesses but not at the expense of their wallets and purses.
Based on the two purchasing decisions we tested, in which small businesses competed against larger companies on the same product or service, small businesses could risk losing almost half (48.4%) of their customers if their prices are just 10% higher than their larger competitors.
The results suggest that the chance of losing customers to a large company may be higher when a small business competes on price for a relatively low-value product, such as an iron, than a higher-value service, like a boiler repair. This is based on the fact that more people (61.7%) turned their backs on small businesses in the face of a 10% price difference in the iron scenario than those who faced the same price difference in the boiler repair scenario (35.1%).
Price is clearly a crucial factor in how people choose to shop. Half of the people iwoca surveyed (53%) said they could recall a recent time they’d chosen a large company when they could have shopped with a small business instead. Of those, 7 in 10 said they chose the larger business because it offered a better price.
But on many products and services, economies of scale give big businesses the edge on price, which means small businesses must look beyond their prices to attract customers.
According to iwoca’s survey findings, the top five factors that the public said could encourage them to shop at small businesses more often were:
Only 2% of people said there was nothing that could encourage them to buy from small businesses more often than they currently do, which shows the door to attracting more trade is open to small businesses as long as they can offer a more diverse and personal customer experience.
A total of 1,300 British adults were surveyed in September of 2019 through an independent consumer research platform. Respondents’ ages and genders were representative of the UK adult population.
Two surveys were carried out. In the first, 602 people were shown seven fictitious news scenarios based on real news stories. Half the respondents saw small business versions of the stories, while the other half saw big business versions. At no point were they explicitly told that the survey was about their feelings towards Britain’s small businesses.
Respondents rated how they felt about each story using a Visual Analogue Scale that ranged from 0 to 100, with 100 indicating the most support. To increase confidence that the differences in ratings observed between the small business and large business scenarios reflected population-level differences as opposed to sampling variability, we conducted a Mann-Whitney U test on each scenario’s data. This is a statistical test of the difference between two independent groups, which is the experimental scenario that reflected the survey design, as respondents only saw the small business or large business version of each scenario.
In each of the six cases where the group difference was statistically significant, the p-value was below 0.0001 (i.e., less than 0.01%). The p-value reflects the probability of obtaining the group difference observed in our sample if the true population difference was equal to zero.
In the second survey, 698 people were presented with two purchasing decisions. In the first, they were asked to imagine they needed to buy a new iron and that they could choose to purchase it from either a small business or larger retail chain. The model of iron was identical in both cases, and the stores were equally convenient to buy from.
For each buying decision, we used a logistic regression model to investigate the relationship between the increasing price difference and the probability of choosing the small business instead of the large business. First, we ensured that the probability of selecting the small business varied systematically with price by evaluating several measures of model fit, as well as the p-value for the price predictor. In both cases, business selection was significantly predicted by price difference. The model fit was improved in both scenarios by also including a dummy variable that represented whether the price was the same or different (i.e., price difference was 0). This decision was made because there is a qualitative change from a price difference of 0 to 1, as the product/service shifts from being the same price to becoming more expensive. This qualitative shift has a greater impact on purchasing decisions than the same price increase from other points on the scale.
We then used this model to produce the curves presented in the results. The advantage of this over presenting the raw values is that it gives a trend we expect to more accurately reflect the population. In addition, the statistical significance adds weight to the systematic nature of the relationship compared to simply reporting the raw value percentages at each price difference.
We defined the tipping point for the majority of Brits, where most people would choose the large business, by finding the lowest price difference at which the model predicted that less than 50% of people would choose the small business.
Get a regular dose of the best small business finance news, stories and curated articles sent direct to your inbox. Sign up for our newsletter. No spam just inspo.