Small Business Ecosystem Dynamics

Growth-based classification vs. traditional small business segmentation

Why identifying development stage, growth format and growth scale are key to more effectively delivering growth solutions to small business owners.

What is growth-based classification?

Growth-based classification uses development stage, growth format and growth scale as a foundation for categorizing firms, rather than traditional small business segmentation.
 
Development stage defines where the firm is in their business lifecycle.
 
Growth format defines the manner in which the firm is currently planning substantial growth: adding an establishment, launching a new firm, allocating funding, or relocating the firm or an establishment.
 
Growth scale is the total number of establishments (locations) a firm has including current planned expansion establishments.
 
We define traditional small business segmentation as categorizing firms using industry (NAICS / SIC), revenues, employee count, company age and digital engagement. Digital engagement includes website characteristics & analytics, content, social media usage, SEO / SEM, e-commerce, and local citations.
 
 

The Traditional View

If we compare two firms using traditional small business segmentation it looks like this:
 

Firm A – Tom’s Restaurant

Industry: Restaurant
Company age: 8 years
Company size: 80 employees
Revenues : $8 million
Locations: 4 establishments
Digital engagement: High
 

Firm B – Christina’s Restaurant

Industry: Restaurant
Company age: 5 years
Company size: 20 employees
Revenues: $2 million
Locations: 1 establishment
Digital engagement: Moderate
 
Firm A would appear to be more motivated by growth, as they have more employees, higher revenues, more locations, and higher digital engagement.
 
They would also appear to be more likely to experience substantial growth and create new jobs, as they are larger, older and have higher revenues, and older more established firms account for a higher percentage of revenues and jobs¹.
 
Firm A would also appear to be more likely to be receptive to new solutions, as they have more employees (enabling the owners mental bandwidth to focus on improvement and growth), higher revenues (financial ability to implement new solutions), more locations (more complex operations), and higher digital engagement (generally signals higher receptivity to new solutions).
 
 

The Growth-Based View

The picture changes dramatically when you view the same firms through a growth-based perspective: development stage, growth format, and growth scale.
 

Firm A – Tom’s Restaurant

Development stage: Sustain – Disengage
Growth format: None
Growth scale: 4
 

Firm B – Christina’s Restaurant

Development stage: Expansion
Growth format: Add Establishment
Growth scale: 2
 
Using growth-based classification, we can determine that Firm A is currently focused on maintaining the status quo as they are at sustain-disengage development stage (they are a profitable firm and the owner has focused their attention elsewhere in life – they have largely disengaged from the business).
 
It is actually Firm B that is currently more likely to be motivated by growth and to experience substantial growth, as they are at an expansion development stage, currently planning to expand their single establishment firm into a small chain by adding an establishment.
 
They are also more likely to be receptive to implementing new solutions, as expansion stage is often an inflection point where owners re-enter a “sourcing” mindset as they determine what solutions they need to support their expansion. Firm B is also currently more likely to create new jobs as it is highly likely they will need more employees to operate the new establishment.
 
Growth-based classification also allows us to determine their current growth priority: they are an expansion stage firm, their growth scale is 2 and their format is “add establishment” – they are currently working to expand their single establishment into a small chain by adding a second establishment. We can now deliver solutions that are relevant and effective for achieving that format and scale of growth.
 
Development stage is the key indicator, growth format and scale provide insight into current growth priorities.
 
 

Seed stage firms

Another key benefit of growth-based classification is the ability to identify seed stage firms – those who would not yet be classified by traditional segmentation, as they don’t have revenues or employees, their company age is zero and they are still establishing their digital presence.
 
Seed stage firms are highly likely to currently be motivated by growth and receptive to new solutions, and to experience substantial growth and create new jobs².
 
 

Why this matters

1. Most small businesses are motivated by lifestyle considerations not growth³, and the vast majority are not receptive to new solutions in general⁴, will not experience substantial growth and don’t create new jobs⁵.
 
Growth-based classification enables you to identify the firms currently most likely to be growth-motivated and receptive, to experience substantial growth and to create new jobs. Traditional segmentation does provide some insight, but it is outweighed by current development stage.
 
2. Small business owners live in the moment⁶ and want solutions to current priorities, not generalized value⁷.
 
Growth-based classification enables you to identify and segment firms by their current growth priorities. Growth priorities define the format and scale of growth the owner is currently working to accomplish, such as launching a new single establishment firm or expanding a single establishment firm into a small chain by adding an establishment. While both firms are small businesses pursuing substantial growth, they have different priorities and mindsets.
 
Traditional segmentation provides no insight into growth priorities.
 
 

A growth-based classification standard

Developed by SMB Intelligence in 2018, Prime Growth is a growth-based classification standard for the small business sector. The purpose of the standard is to identify prime growth firms and segment them by their current growth priorities.
 
Prime growth firms are independents or small chains, that are employers, with a commercial location, currently at a seed (new) or expansion (high growth) development stage. They are the small businesses currently most likely to be motivated by growth⁸ and receptive to new solutions⁹, to experience substantial growth¹⁰, and to create new jobs¹¹.
 
Learn more about Prime Growth Classification