Small Business Ecosystem Dynamics

Identifying the small businesses most receptive to new solutions

Prime growth firms are nearly twelve times more likely to be receptive to implementing new solutions than small businesses in general.

Background

Developed by SMB Intelligence in 2018, Prime Growth is a growth-based classification standard for the small business sector. Growth-based classification uses development stage, growth format and growth scale to categorize firms rather than traditional small business segmentation (revenues, company age, company size, and digital engagement).
 
The purpose of the standard is to identify current prime growth firms and segment them by their current growth priorities.
 

What are prime growth firms?

Prime growth firms are independents or small chains, that are employers, with a commercial location(s), that are currently at a seed (new) or expansion (high growth) development stage.
 
They are the small businesses currently most likely to be motivated by growth¹ and receptive to new solutions², and if successful in their current growth plans, to experience substantial growth³ and create new jobs⁴.
 
At any given time only roughly 1% of all small businesses would be defined as prime growth⁵.
 

Understanding receptivity

Small business receptivity refers to the current mindset of an owner towards implementing new solutions (a product, service, process or way of thinking) into their firm, including all the risk, expense, discomfort and time involved in doing so. The more likely an owner is to implement new solutions in general, the more receptive they are considered.
 
Receptivity is largely determined by current development stage. While traditional small business segmentation (revenues, company size, company age, digital engagement) provides some insight into current receptivity, it is outweighed by current development stage⁶. This also means that the firms who are currently most likely to be receptive is continually changing, as firms enter and exit the sector and move through development stages.
 
 

Receptivity vs. interest

It is important to differentiate between receptivity and “interest”. Owners can show “interest” in a specific solution at a given time. Receptivity is the underlying mindset that determines their current willingness, or lack thereof, to actually implement new solutions in general.
 
 

Why this matters

The vast majority of small businesses are unreceptive to implementing new solutions⁷, even if there are “better” options available. Once owners establish a solution, they rarely switch. In a study conducted by CEB, in a given year for a given category, only 7% of owners reported switching their solution provider, and nearly 70% of owners reported never switching at all⁸.
 
In contrast, prime growth firms are much more likely to be receptive. In our 2017 Q4 Prime Growth Briefing, 81% of prime growth firms reported they are currently receptive to implementing new solutions, particularly if they support their current growth priority⁹.
 
 

The big question

Why are prime growth firms the small businesses currently most likely to be receptive to new solutions?
 
 

Employers are more likely to be receptive than nonemployers.

Employer small businesses are more complex, have higher average revenues¹⁰, and access more startup capital that nonemployers¹¹. They also have employees to support the owner in the day-to-day operation of the firm.
 
Employer firms are more likely to be currently motivated by growth¹², to have more business challenges that need solutions, the financial resources to acquire and implement them, and the support staff to allow the owner the mental bandwidth to focus on improvement and growth, not just day-to-day operations and survival.
 
 

Firms with a commercial location are more likely to be receptive than home-based firms.

Small businesses with a commercial location are more complex, have ten times higher average revenues¹³, and have an average of ten times more employees than home-based firms¹⁴.
 
Firms with a commercial location are more likely to currently be motivated by growth, to have more business challenges that need solutions, the financial resources to acquire and implement them, and the support staff to allow the owner the mental bandwidth to focus on improvement and growth, not just day-to-day operations and survival.
 
 

Firms at a seed or expansion development stage are more likely to be receptive than at the other seven stages.

Owners of seed or expansion stage firms are more likely to be in a “sourcing” mindset versus an “operating” mindset¹⁵.
 
A sourcing mindset means owners have allocated mental bandwidth to engage with new solution providers – it is a current priority. An operating mindset means owners do not view engaging with solution providers as a priority – they have what they need to operate and mental bandwidth is focused on day-to-day operations with existing solutions.
 
Owners of seed stage firms are highly likely to be in a sourcing mindset as they need to find and acquire all of the solutions necessary to launch and operate.
 
Expansion stage owners are likely to be in both an operating and sourcing mindset, as they continue to operate their existing firm, but are also sourcing solutions that support their expansion.
 
Expansion stage can often be an inflection point for an owner, causing them to review their existing providers and consider switching or adding additional solutions.
 
Firms at the other seven development stages are likely to be deep in an operating mindset and generally unreceptive to new solutions, as they have what they need to operate (even if it’s not ideal, “it’s fine”). They are most often focused on survival or maintaining the status quo, and will rarely change providers unless something breaks or becomes too painful to continue (a “breaking point”), or they enter an expansion development stage.
 
 

Firms that are highly digitally engaged are more likely to be receptive than low engagement firms.

Prime growth firms are highly digitally engaged¹⁶. Small businesses with an advanced level of digital engagement have nearly four times the revenue growth and are nearly three times as likely to create new jobs as those with a basic level¹⁷.
 
Highly digitally engaged firms are more likely to be motivated by growth, to have the financial resources to acquire and implement new solutions, and the support staff to allow the owner the mental bandwidth to focus on improvement and growth, not just day-to-day operations and survival.