SMEs are 99% of Japanese companies. Decide who you're selling to first

Series「Five numbers to read before entering Japan」 · Part 4 of 5

Japan has 3.375 million companies. By the SME Agency's classification, 10,364 of them are large companies, 0.3% of the total. 3.365 million are SMEs, 99.7%. And 2.853 million of those are micro businesses (20 or fewer employees in manufacturing, 5 or fewer in commerce and services), which is 84.5% of all firms. SMEs account for roughly 70% of employment.

Nearly every business plan for entering Japan quotes these figures, then adds a line about the vast potential of Japan's SME market. The line says nothing.

The usual reading is that Japan has many SMEs

Many compared to what? SMEs are over 99% of companies in every country. That's simply how firm sizes are distributed everywhere. What's specific to Japan is the shape of the pyramid. There are only ten thousand large companies, and those ten thousand account for about 30% of employment and over half of value added. At the bottom sit 2.85 million micro businesses averaging fewer than five people each.

The middle layer, mid-sized companies of 20 to 300 people, is roughly half a million firms. On most foreign companies' target lists this layer is blank. It's too small for enterprise sales to reach, and too big for channels built for small shops.

The layer decides the channel

When I design a sales system, I go in a fixed order. Decide who to sell to, then how to sell, then who sells. These figures belong to the first step, and the first step largely decides the second.

If you sell to the ten thousand large companies, direct sales can reach them, and each one is worth a dedicated person. But decision chains are long, cycles run in years, and incumbent supplier relationships are deep.

If you sell to the half million mid-sized companies, direct sales can't cover them. You depend on distributors, system integrators and trade associations, each covering one patch, none overlapping.

If you sell to the 2.85 million micro businesses, only indirect channels work. That means financial institutions (regional banks and shinkin banks' corporate client networks), chambers of commerce, tax accountants and platforms, with the cost per company reached pushed below a few thousand yen.

Channel, pricing, product form and the shape of the sales team differ completely across the three layers. Go after all three at once and you're building three sales systems at the same time, all competing for the same resources.

Pick a layer, then price the cost per company

Here is the entry decision this number changes. Your target customer isn't an industry. It's one layer within an industry.

First, pick one of the three layers, large, mid-sized or micro, as the target for the first two years. Your unit price and decision cycle decide which. A high-ticket, customized product points to large or upper mid-sized companies. A standardized, low-ticket one points to micro businesses, but only once you've confirmed there's an indirect channel that can reach them.

Second, work out what it costs to reach one company in that layer. For direct sales it's the labor cost of a visit. For distributors it's their margin share. For platforms it's the acquisition cost. Multiply by the number of companies you need to reach and you have your sales budget. That number should exist before you hire the first salesperson.

This is also the premise of Why distributors don't sell your product. A distributor isn't a supplement to direct sales. For a particular layer of customers, it's the only viable channel. You only know whether you need distributors, and which kind, after you've chosen the layer.

A common mistake

It usually goes like this. HQ's product sells to large companies at home. In Japan the large companies won't open the door, so the team turns to micro businesses and keeps the enterprise product form and price. For a small shop the product is too heavy and too expensive. The channel is still direct sales, so each deal costs more than the ticket. The product was fine. The team picked one layer and ran another layer's playbook. Draw the team before the product argued for product before organization. This starts one step earlier. Customer layer comes before product.

Check yourself

Which of the three layers is your Japan target customer in? Have you worked out the cost per company reached? If your answer is "all three," you haven't chosen yet.