The size of the SMB market is hard to define. We can all agree it’s big and success requires a verticalized approach because small businesses vary in several ways. Yet how big is it?

For SaaS companies, the addressable market is a big deal. If you’re helping small businesses with client management, marketing, payroll, web design, tax filing and accounting, or customer support, the addressable market matters – for fundraising, sales and marketing tactics, and then, deciding whether to go upmarket.

Group 1: Employer SMBs

The United States Small Business Administration reported 28.8 million small businesses in the US as of 2013. Interestingly, 80% are single-person businesses (non-employers). If we assume a modest increase in the number of small businesses since 2013 (i.e. 3% given the rate of new starts and turnover), we can assume there are approximately 32 million small businesses today.

To put that in context, the United States Bureau of Labor Statistics reports nearly 160 million working-age Americans. We don’t know how many people own multiple businesses, but we can assume approximately 2 out of every 10 working age Americans owns a small business.

And 20% of those businesses have employees. Therefore, if your SaaS solution is geared toward employees (e.g., payroll), the addressable market is 6.4 million potential customers.

Group 2: Solo SMBs

Government data is less helpful for the growing number of independent workers. A recent report from Freelancer’s Union and Upwork claims there are 57 million freelancers in America that attribute $1.4 trillion in small business income to our economy. Surely, many of these freelancers are part of the SMB market.

Freelancing is a term that tends to describe a single person doing the work an employee would normally do but under contract terms. The Upwork survey defines freelancing as any type of supplemental, temporary, project, or contract-based work within the past 12 months.

Based on this definition, we likely are not overlapping the Employer SMBs. If you position your business as a web development shop, an e-commerce store, or a digital marketing agency, you’re unlikely to call yourself a freelancer.

To get to 57 million freelancers, the Upwork survey sampled a large group of workers in the US. The group included workers who have traditional employee-structured jobs as well as workers who primarily work for themselves. The survey found 36% (or 57 million out of 160 million working-age Americans) freelanced within the past 12 months.

Given that 47% of Millennial workers indicated earning some sort of freelance income, we will continue to see an increase in freelancing as the population ages.

However, most of these freelancers are not an addressable market for SaaS SMB companies. Based on the survey, 69% of freelancers are doing it part-time for various reasons, such as having a traditional day job. Some of the part-time freelancers may want a cloud-based app to better run their business, but that will be a marginal upside. Only 31%, or 17.5 million freelancers, are full-time.

Additionally, FreshBooks recently surveyed people who consider self-employment as their primary source of income. The survey found 77% of small businesses earn more than $20,000 per year. This is a proxy for willingness to pay. Put it this way: if your small business earns less than $20,000 per year, you’re unlikely to spend those dollars on SaaS solutions.

Putting these two sources together, 77% of the 17.5 million freelancers are part of the addressable market. That’s 13.5 million potential customers.

Total Addressable Market

By combining public and private data sets, we can estimate the addressable size of the SaaS SMB market.

Employer SMBs 6.4 million customers
Solo SMBs 13.5 million customer
Total Addressable SMBs 20 million customers

Suppose your SaaS pricing is $100 per customer per year. By targeting employer and solo SMBs, the addressable market is $2B – you just have to get there one vertical at a time!