Even though the economic situation of small and medium-sized towns (SMSTs) is diverse across European regions and countries, we argue that three major socio-economic profiles of local economy can be observed in SMSTs. The first profile is a SMST with a dominant 'residential' economy that mostly relies on local activities that meet the needs of people in an area, be they residents, commuters or tourists. The second profile corresponds to a town with a dominant 'productive' economy based on production of goods and services to be exported and consumed out of its area. The third profile is the one with important share of activities in the 'creative-knowledge' economy that is based on entrepreneurship, creativity and knowledge, and on networks and collaboration in innovation. Furthermore, we suggest that profiles are shifting as SMSTs are making choices between residential economy, competitiveness and innovation. As a result, better performance of SMSTs in terms of positive demographic change and job growth is underpinned by a combination of crucial factors: proximity to a large city (access to bigger market), performance of their wider region, skilled resident active population, numerous existing local businesses, etc. By observing and analysing socio-economic dynamics in 30 European towns, this paper seeks to contribute to a scientific discussion on importance of SMSTs for the future development of European territory.