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 are large companies, 0.3%; 3.365 million are SMEs, 99.7%; and of those, 2.853 million are micro businesses (20 or fewer employees in manufacturing, 5 or fewer in commerce and services), 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: Japan has many SMEs

Many compared to what? SMEs are over 99% of companies in every country. That is the universal shape of firm-size distributions, not a Japanese feature. Japan's real feature is the shape of the pyramid: only ten thousand large companies, and those ten thousand account for about 30% of employment and over half of value added; 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: too small for enterprise sales to reach, too big for channels built for small shops.

The method's reading: the layer decides the channel

My order for designing a sales system is: decide who to sell to, then how to sell, then who sells. These figures belong to step one, and step one directly determines step two.

Selling to ten thousand large companies: direct sales can reach them, each is worth a dedicated person, but decision chains are long, cycles run in years, and incumbent supplier relationships are deep. Selling to half a million mid-sized companies: direct sales can't cover them, so you depend on distributors, system integrators and trade associations, each covering one patch, none overlapping. Selling to 2.85 million micro businesses: indirect channels only, through financial institutions (regional banks and shinkin banks' corporate client networks), chambers of commerce, tax accountants, platforms, with 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. Attacking all three at once means building three sales systems at once, and the three compete for resources.

The action: pick a layer, then price the cost per company

The entry decision this number changes: the target customer is not an industry. It is one layer within an industry.

Two steps. First, choose one of the three layers, large, mid-sized or micro, as the target for the first two years. The criterion is your unit price and decision cycle: high ticket and customized points to large or upper mid-sized; standardized and low ticket points to micro, but only after confirming an indirect channel exists that can reach them. Second, calculate the cost of reaching one company in that layer: the labor cost of a visit for direct sales, the margin share for distributors, the acquisition cost for platforms. Multiply by the number of companies to reach, and that is your sales budget, a number that should exist before the first salesperson is hired.

This is also the premise of Why distributors don't sell your product: a distributor isn't a supplement to direct sales. It is the only viable channel to a particular layer of customers. Only after choosing the layer do you know whether you need distributors, and which kind.

A common mistake

HQ's product sells to large companies at home. In Japan the large companies won't open, so the team turns to micro businesses, keeping the enterprise product form and price. The product is too heavy for a small shop, too expensive, and the channel is still direct sales, so cost per deal exceeds the ticket. The problem isn't the product. It's choosing one layer and using another layer's playbook. Draw the team before the product argued product before organization; here the sequence starts one step earlier: customer layer before product.

Check yourself

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