The North American Industry Classification System, commonly known as NAICS Code, is an industry classification system developed by the statistical agencies of the United States, Canada, and Mexico under the Office of Management and Budget (OMB). The purpose of this collaboration was to produce standard industry definitions for the three North American countries. NAICS Codes replaced the Standard Industry Classification system (SIC Codes).
Since 1997, it has been used to classify companies into specific industries and for standardized statistical analyses of businesses.
These codes can be used to search for industry and trade statistics, competitor information, financial details, and more.
NAICS Code provides uniformity and comparability in the presentation of statistical data. It is based on a production-oriented concept and groups businesses into industries according to the processes they use to produce goods or services.
NAICS was designed for statistical purposes. It is also frequently used for various regulatory, administrative, taxation, contracting, and other non-statistical purposes.
Various agencies also use it for their procurement programs. An important point to know is that NAICS is an industry classification system, not a product classification system. For product classification, NAPCS ( North American Product Classification System) is used. A business is assigned one NAICS code based on its core business activity. However, multiple NAPCS codes can be linked to a business to indicate its various products.
NAICS Coding System
The NAICS classification system uses a hierarchical six-digit coding system. It classifies all economic activities into 20 different industry sectors. Out of these 20 industries, 5 primarily produce goods while the remaining 15 provide some service. For statistical purposes, every company is assigned a primary NAICS code, indicating its primary business activity.
How to read NAICS Code?
The initial two digits in a NAICS code reflect the primary business sector in which a company operates. The third digit indicates the company’s subsector, and the fourth digit indicates the industry group. The fifth digit of the code reflects the industry the business operates in. The sixth digit designates the company’s specific national industry.
Let’s now understand this with the help of an example.
Breaking Down a NAICS Code
Let’s use this - 721110 code as an example.
- The first two digits - 72 indicates that the company operates in the Accommodation and Food Services Sector.
- The third digit, 721, indicates the Accommodation subsector.
- The first four digits, 7211, indicate the Traveler Accommodation industry group.
- Adding the fifth digit, 72111, indicates the Hotels and Motels industry.
- The sixth digit, 721110, indicates that the business operates in the Hotels and Motels industry in the United States. The Accommodation and Food Services sector will always begin with 72, Manufacturing industry business with 31, 32 or 33. 51 is for the finance and insurance industry.
If you’re interested in government contracts, financing options, your competitors, potential customers, the right business opportunities, and tax incentives, having the right knowledge of NAICS Codes is pertinent. The above guide describes the basics of using NAICS codes. You can use NAICSCode’s specially developed tools to decide which one best describes your business activity.