Size of Small Business Market

The small business market is a coveted target among many who sell B2B.

Among large corporations that have exhausted their growth in the enterprise market, small businesses are seen as fertile ground for new prospects.

Among smaller businesses, often their initial strategy is to serve other small and midsize businesses.  Smaller customers are easier to come by because there are more of them.

But understanding the small business market can be tricky.  That's because it covers a wide range of business needs, and those needs are often (although not always) related to business size. 

"What is a small business?" is not the easiest question to answer.  For instance, the definition of small business varies by country. It also varies by vendor.  There is considerable confusion in what size constitutes a small business.

The following overview is designed to clearly lay out what a small business is in the United States.

Small Business Statistics

First, some statistics.  In the United States alone there are nearly 27 million small businesses, according to statistics from the Small Business Administration (SBA). The generally accepted definition of "small business" is under 500 employees.  (Although for lending, contracting and other purposes the SBA actually has a variety of size standards depending on the industry).

But let's break these numbers down further:

Of those ~27 million small businesses, approximately 20.4 million are solo players.  That is, they are single-person businesses.  These are what are called "nonemployer" businesses in government terminology, because they have no employees (assuming you do not count the owner). For detailed numbers of nonemployer businesses, visit this  U.S. Census report.

Of businesses considered "employer" businesses, there are 5.9 million as of the 2005 U.S. Census -- the latest figures available.  Of these, the vast majority, or 5.3 million, have fewer than 20 employees.  For the full breakdown, visit this chart from the SBA's Office of Advocacy for employer business statistics.

When you add the totals of the nonemployer (single person) businesses and those businesses that have employees, that's how you get to nearly 27 million small businesses in the United States.

To net it all out, the vast majority of small businesses -- 25.7 million -- have either one person in the business (the owner) up to 19 employees.   Roughly 600,000 have between 20 employees up to 499 employees.

So as you can see, the small business market consists mainly of millions of businesses which are very ... well ... small.  The larger end of the small business market is fairly limited.

The Confusion of the Term "SMB Market"

Often vendors that expect to sell to small businesses in actuality are thinking of businesses in the 50-to-100 employees and up range.

A business of 100 to 500 employees is usually referred to as a "small and medium sized business" or the acronym "SMB".  So you will often see references to the "SMB market" loosely bandied about to refer to any small business.  But most enterprise vendors looking to go downmarket are really looking at this larger end of the small business market -- the 100  to 500 employee size.  They are not targeting the smaller-sized small businesses.

If you examine the statistics for employer firms, you find there are:

•  roughly 200,000 businesses in the U.S. having between 50 and 500 employees
  
•  fewer than 100,000 businesses in the U.S. having between 100 and 500 employees

Thus, you can see that the SMB market has a much narrower scope than the "small business" market, and consists of far fewer than 27 million businesses.  The SMB market is anywhere from ~100,000 businesses to a little over 200,0000 businesses, depending on whether you define the SMB market as starting at 50 employees or 100 employees. 

Vendors Create Their Own Size Segmentations

Large vendors that sell to the small business market and analyst firms that follow the small business market have developed their own small business segmentation definitions.

One way to define small businesses is according to their needs for the product or service a vendor is selling. 

Other vendors break down the small business market into various sub-categories -- Microsoft and IBM are two examples of slicing and dicing by size in different ways.  Microsoft considers small businesses as having fewer than 50 employees -- SMB starts at 50 employees and up.  IBM extends its definition of SMB up to 5,000 employees --  see more of IBM's segmentation here.

If you want to understand the small business market, it's important to understand your terminology and pick a way of segmenting the market that makes sense:

In general, the small business and SMB marketplaces could use a lot more clarity -- clarity as in what size business a particular solution may be best suited for. Otherwise vendors risk confusing their prospective customers.  And a confused prospect means a longer sales cycle.  One party may be thinking of a small business with eight people in it, while the other is imagining a business with 800 employees. Those two businesses will be light years apart, as measured by their needs, their budgets, and their internal level of IT expertise. There’s no sense in either side -- prospect or vendor -- wasting time on a solution that isn’t appropriate for the company needs.