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I know you are scratching your head and asking just how on Earth a small business can simultaneously fail at marketing and do great with social media when social media is so closely identified with marketing.

Well, the answer, dear readers, is in the 5th wave of the Small Business Success Index (SBSI), which was published last month.  The SBSI is based on a survey of small business owners that is conducted every 6 months.  It measures the competitiveness of small businesses compared to larger companies, and it is based on 6 criteria: capital access, marketing/innovation, workforce, customer service, computer technology, and compliance.

It is no surprise that small businesses are highly competitive when it comes to both customer service (B+) and compliance (A-).   Marketing, on the other hand, got a D (and was labeled as getting worse), while computer technology, which social media falls under, got a C.

Here’s what’s going on:

During the 2nd half of 2010, which this current SBSI report examined, small business success in marketing and innovation remained at a low-point after dropping earlier in the year.  At the same time investments in web-based technology (including social media) increased.

The reason for the drop in marketing competitiveness stems from the belief of small business owners that they cannot position themselves as having the same capabilities as the big companies in their industry (only 33 percent believe they can).  They also struggled with identifying new prospective customers (which dropped from 47 percent to 39 percent in a year).  Basically, small businesses are lacking confidence in their abilities, struggling to effectively communicate the pros of working with a small business, and failing to attract leads and convert them into sales.  In other word, we’re like Sisyphus.

As a result, they began investing in technology (websites, social media, and search engine optimization (SEO) programs) to bridge that gap.

When you look at the numbers, though, it’s no wonder small businesses struggle to compete with large companies: they are not online!  Only half (56 percent) of small businesses have websites.  Of those businesses with websites, only a quarter (27 percent) have a SEO program in place.  So not only do many small businesses lack an online presence, most of them are basically invisible to search engines.

Simply having an online presence to generate leads (which a third of small businesses said is their goal) is not enough, of course.  It must be maintained and updated consistently with fresh content, such as new blog posts, eBooks, white papers, digital brochures, events, testimonials, case studies, and other useful information that demonstrates a business’ expertise and keeps potential and current customers returning often.  Unfortunately, 55 percent of small businesses update their sites less frequently than once a month, and 26 percent update them no more than once a year.

With the emphasis on lead generation via their website, small businesses owners are using social media to engage existing customers (rather than identify and attract new customers).  31 percent use social media, up from 24 percent a year ago and 12 percent two years ago.  The most commonly used social media sites, by the way, are Facebook (27 percent) and LinkedIn (18 percent).

The investment in social media seems to be generating a decent ROI for small business owners.  25 percent believe that their investments in social media “made a profit” in the past 12 months, 15 percent believe they “lost money,” and 46 percent believe they “broke even”.  When compared to last year’s numbers, the trend appears to be greater profitability.

So, to go back to the original question: why is there such a big difference between the success of marketing and social media by small businesses?  It is far easier to engage with current clients than find new ones.

Image via Flickr (Creative Commons) by vintagedept

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