What it means
NAICS was developed jointly by the statistical agencies of the United States, Canada and Mexico so that all three countries could describe industries in the same way. It replaced an older US scheme called the Standard Industrial Classification, or SIC, which had become dated as economies shifted toward services and technology.
The code is hierarchical. The first two digits identify a broad sector, the third narrows it to a subsector, the fourth to an industry group, the fifth to an industry, and the sixth to a national industry.
Reading left to right takes you from "manufacturing" down to something as specific as a particular kind of manufacturing plant. Classification is based on a business's primary activity, meaning the activity that brings in most of its revenue.
A company that makes furniture and also runs a small retail shop would normally be coded as a furniture manufacturer. Large groups that do many things can have different codes for different establishments.
In practice, NAICS codes turn up in loan applications, government contract bids, insurance quotes, market-size research and tax or statistical filings. A lender may set different risk limits for different codes, and a small business programme may define "small" separately for each one.
The system is reviewed and revised periodically, roughly every five years, to add new industries and retire old ones. Because of that, always check which version of the codes a dataset uses before comparing two sources.
One common trap is that the codes describe what a business does, not how big it is or who owns it. A tiny workshop and a global manufacturer can share the same six-digit code, so users often need to add size, revenue or location data before drawing conclusions.
In practice
Real-world examples.
Example
A small restaurant group applies for a business loan. The bank enters its NAICS code into its credit system, which pulls industry default statistics and sets a higher required cash buffer than it would for a professional services firm.
Example
A market analyst wants to size the demand for commercial refrigeration equipment. She uses the relevant six-digit code to pull government figures on the number of manufacturers and their combined shipments, then compares them with a neighbouring code for a fair benchmark. The result gives her a defensible market-size estimate to present to the investment committee, along with a clear note of which code version she used.
Example
A logistics start-up bids for a public sector contract that restricts entry to firms below a size limit. The tender names a NAICS code, and the start-up checks that its main activity fits the code so that the size rule is applied correctly. A wrong code could have excluded it from the bid or, worse, led to a compliance question after the award.
Case study
Seen in the real world.
Brightfold Packaging is an illustrative, fictional company that makes printed cartons and, as a side line, runs a small design studio. When it applied for equipment finance, its application listed a code for graphic design because the founder was proud of the studio.
The lender's underwriter pointed out that about 85% of revenue came from carton manufacturing, so the primary activity was manufacturing. The application was re-coded, and the manufacturing code qualified the firm for an equipment-finance product with a lower rate.
In this illustrative case the correction took a day and saved the firm real money, because the lender's pricing model had been using the wrong industry risk data. The takeaway is that a code should reflect the activity that earns most of the revenue, not the one the owners find most glamorous.
Watch out
Common mistakes.
- Choosing a NAICS code by what sounds impressive rather than by the main source of revenue, which can distort credit terms and statistics.
- Comparing data from two different revisions of NAICS without checking that the codes mean the same thing.
- Treating NAICS and SIC codes as identical, when many SIC categories were split, merged or renamed.
Questions
People also ask.
Is NAICS only used in the United States?
No, it was built jointly with Canada and Mexico, and many countries use their own related systems for similar purposes. Anyone comparing companies across regions should check how the local codes map to each other.
Can a company have more than one NAICS code?
Yes, a company can carry several codes for its different establishments, but it normally declares one primary code on forms. If the business changes direction, the primary code should be reviewed and updated.
How many digits does a NAICS code have?
A full code has six digits, and shorter versions of two, three, four or five digits describe broader groupings. The six-digit level is the one most often requested on forms.
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