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.
By Steve Waters
Founder / CEO, SMB Intelligence
May 21, 2018
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
Company age: 8 years
Company size: 80 employees
Revenues : $8 million
Locations: 4 establishments
Digital engagement: High
Firm B – Christina’s 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
We define substantial growth as rapidly increasing revenues and adding employees (eg. adding an establishment). We define incremental growth as gradually increasing revenues (eg. adding a new customer).
1. Headd, Brian. “Young Businesses are Small, But Small Businesses aren’t Necessarily Young”, Small Business Administration, December 2014. Available online.
2. Waters, Steve. “The Importance of Small Business Development Stages”, SMB Intelligence, May 2018. Available online
3. Only 24% of owners report wanting their firm to be “as large as possible”, and more than 50% of owners cite lifestyle benefits such as “flexibility over schedule” or “be my own boss” as a primary reason for starting their firm. Pugsley, Benjamin Wild and Erik Hurst. “What Do Small Businesses Do?”, Brookings Papers On Economic Activity, Fall 2011. Available online. Only 33% of owners say their primary goal is to grow. The Hartford. “2015 Small Business Success Study”, 2015. Available online. 50% of owners started their business for non-financial reasons like wanting to be their own boss, tired of working for others, wanting to set their own hours, and the desire to pursue a passion. Only 12% of owners want to grow to staff larger than 50 people. Infusionsoft. “Defining and Achieving Small Business Success”, 2016. Available online. While 88% of owners report “increasing revenues” as their key business goal over the next three years, only 24% report wanting to add an establishment. Shopkeep. “2018 Shopkeep Small Business Pulse”, May 2018. Available online.
4. In a given year for a given category, only 7% of small business owners reported switching their solution provider, and 68% reported never switching. Haque, Naumi. “Small Business Owners Never Switch Suppliers”, CEB, October 28, 2012. Available online. Waters, Steve. “Understanding Small Business Receptivity”, SMB Intelligence, May 2018. available online.
5. The overwhelming majority of small firms do not grow by adding employees from year to year or even over three year periods. Approximately 80% of small businesses do not grow at all, even over a relatively long period. Most surviving small businesses do not grow by any substantial margin – most start small and stay small. Pugsley, Benjamin Wild and Erik Hurst. “What Do Small Businesses Do?”, Brookings Papers On Economic Activity, Fall 2011. Available online. Only 22% of small businesses are planning to hire additional employees in the next 12 months. Bank of America. “Small Business Owner Report”, Spring 2018. Available online. 22% of owners are planning to hire new employees in 2018. TD Bank. “2018 Small Business Survey”, May 2018. Available online. 71% of owners expect savings from the 2017 tax policy changes, however only 14% of those plan to use those savings to hire more employees. Bank of America. “Small Business Owner Report”, Spring 2018. Available online. Seasonally adjusted net 20% (of small business owners) plan to create new jobs. NFIB. “NFIB Small Business Jobs Report”, NFIB, June 2018. Available online. Over the next 12 months 31% of small business owners expect the overall number of jobs at their company to increase, 62% expect it to stay the same, and 7% expect a decrease. Wells Fargo. “2018 Small Business Index Survey”, April 2018. Available online.
6. The average small business has less than a month of cash buffer days (meaning that if something happened that affected their revenue, they would have less than two months before they ran out of cash). 75% of owners have less than two months, 25% of owners have less than two weeks! JP Morgan Chase. “Cash is King: Flows, Balances and Buffer Days”, September 2016. Available online. 40% of owners have no financial backup plan in place. Reliant Funding. “Small Business Report November 2017”, November 2017. Available online.
7. Owners are focused on their immediate business challenges, not future ones. CEB. “The 9 Traits Small Business Owners Share”, September 2015. Available online
8. Waters, Steve. “Most Small Business Owners are Motivated by Lifestyle – Not Growth”, SMB Intelligence, May 2018. Available online.
9. Waters, Steve. “Identifying the Small Businesses Most Receptive to New Solutions”, SMB Intelligence, May 2018. Available online.
10. Waters, Steve. “Which Firms are Most Likely to Experience Substantial Growth?”, SMB Intelligence, May 2018. Available online.
11. Waters, Steve. “These Firms are the Engine of Small Business Job Creation”, SMB Intelligence, May 2018. Available online