What Are Firmographics?

Firmographics are descriptive attributes of firms that can be used to aggregate individual firms into meaningful market segments.  They describe businesses, non-profits, and governmental entities.  Essentially, firmographics are to businesses and organizations what demographics are to people.

For sales and marketing efforts, businesses use firmographics to define their target market.  Regardless of the business product or service sold, different business customers will demand different levels of business products and services.  Firmographics enable businesses to focus their sales and marketing communications on firms that are most likely to be receptive to the individual message or most likely to purchase their offerings.

In the US alone, there are roughly 28 million businesses as of the end of 2012, according to the US Census Bureau.  Of these firms, roughly 75% have no employees and have little business activity, leaving only 6 million businesses in the US with meaningful business activity.  This implies that roughly three-quarters of the businesses that exist in the US are unlikely to purchase much in the way of business products and services and therefore should not be included in most sales and marketing activities.  The fact that most firms are little more than legal entities highlights the need to segment business markets to reach firms that are actually likely to purchase.

In using firmographics, one is assuming a definition of the firm.  In general, a firm is defined to be an organization which transforms inputs into outputs.  For practical purposes, this implies that firms can be stand-alone entities engaged in a single line of business or activity, business divisions or locations of a larger organization engaged in select areas of businesses, or entire corporations and governmental bodies.  This definition of the term firm is used to include organizations ranging from governmental bodies, non-profit organizations, and global corporations, to small retail shops, legal practices, and independent contractors.

Firmographics will describe a firm along many different dimensions.  The most commonly used descriptive dimensions include industry, location, size, status or structure, and performance.

Industry

Industry firmographics refer to the activities of the firm.  At a very high level, organizations can be classified into business and government segments.

Many businesses find certain sectors of the economy are more interested in their products and services than other sectors.  For example, utility supply manufacturers and distributors of high-voltage transformers, circuit breakers, cables, and other equipment would primarily target electric utilities in their customer base and may segment these utilities according to the number of customers they serve, miles of transmission wire under management, or power generated.  These utility supply manufacturers and distributors would be unlikely to sell as many high-voltage transformers to businesses whose primary activity includes retail, finance, or educational services.  As such, it is natural for utility supply manufacturers and distributors to primarily target firms fitting the firmographic of electric utilities and have few if any marketing efforts that would involve firms primarily conducting retail, finance, or educational services.

Most business activities are naturally constrained to certain industries due to their core competencies or the demands of the customers.  Only a few business activities are not.  Therefore industry type becomes a natural market segmentation variable for businesses.

The dominant business segmentation variables are those associated with an NAICS or SIC code.  NAICS refers to the North American Industry Classification System adapted by the U.S. Census bureau in 1997.  SIC refers to the older Standard Industrial Classification system that was established in 1937.  Either NAICS or SIC can be used to identify firms by industry.  While most businesses use the newer NAICS, many still work with the older SIC and both systems can be used with most modern business research reports and tools.

The NAICS divides US businesses into 20 primary areas at the 2-digit level.  Within NAICS, further segmentation of industries can be made at the 3-digit to 6-digit levels, though most businesses focus their efforts at the 4-digit level.  The 20 primary industry areas at the 2-digit NAICS level can be found below.

Government organizations can be segmented by their federal, state, county, regional, city, and municipality status.

Location

Location firmographics refers to the where the business is located.  As a segmentation variable, firms may be aggregated by city, metropolitan statistical area, state, region, country, or continent.  Alternatively, firms may be targeted according to their distance from a central location, usually the location of the firm conducting the sales and marketing effort.

For many businesses, proximity to the customer determines the likelihood that a customer will purchase.  For instance, a business located in Northwest Indiana engaged in the sales, installation, and maintenance of industrial garage doors will be unlikely to conduct much business with a firm located in Southern California, and therefore should spend little time, effort, or money contacting firms outside of its direct region.

Most business activities are naturally constrained to certain regions due to competitive pressures, legal restrictions, and cost constraints.  Only a few business activities are not.  As such, location becomes a natural market segmentation variable for businesses.

Size

Size firmographics define and describe the size of the business.  The most common metrics of the size of a business include revenue and the number of employees.

Out of the 6 million firms with employees in 2008, roughly 60% are very small businesses (less than 5 employees or less than $500,000/yr in revenue) leaving the remaining 40% of businesses with significant heft.  Just because small businesses may have low revenues and few employees doesn’t mean that they are a small market however.  For instance, For instance, Sage and Intuit both offer accounting software targeted towards small businesses while SAP and Oracle both offer software targeted towards for large businesses, and each of these four businesses are quite large and serve a significant number of customers.

Using the number of employees as a metric of size, we might group firms into the following segments.

Using revenue as our size metric, we might group firms into the following segments.

Note, grouping business by number of employees versus annual revenue yields different results.  Marketing and sales professionals are advised to use the segmentation variable which most closely matches their marketing needs.

Status and Structure

Status and structure firmographics can refer to the relation of one organization to another, or it can refer to the legal status of an organization.

For instance, individual establishments (also known as firms by the above definition) may be categorized as being independent businesses, part of a larger parent company, or the headquarters of a parent company.  Similarly, firms may be categorized as being a stand-alone entity, a franchisee of a franchising organization, a subsidiary of a larger organization, or the outlet of a larger organization. Alternatively, firms may be categorized as being a sole proprietorship, limited liability corporation, limited liability partnership, private corporation, or public shareholder-owned corporation.  Other variables describing the status or structure of an organization are used as well.

Performance

Performance firmographics refer to the characteristics of a firm related to its business execution over time.

The duration of a firm’s existence, rate of growth or decline, profits and losses, and changes in profits and losses can all be indicators of the likelihood of a firm to need a business product or service.  Firms in the same industry of relatively similar size but undergoing different rates of growth or decline are likely to have very different demands for business services.  As such, they can form meaningful segmentation variables.

Opportunity Identification

Once the above firmographics have been used to identify business and organizational market segments relevant to a business, data sources such as Dun & Bradstreet, Hoovers.com, Experian, Salesgenie, InfoUSA and others can be used to develop lists of ideal candidates for targeted sales and marketing campaigns conducted either via direct mail, phone calls, tradeshows, or advertising media.  In this manner, a universe of 28 million potential businesses and 100 million potential contacts can be reduced to 1,000 relevant contacts, and the laborious process of prospecting can be converted into a profitable gold mining operation.