Historically, about half of all small businesses fail within the first five years. The information industry has the highest failure rate in the United States, with 25 percent of these businesses failing within the first year. Further, forty percent of information industry businesses fail within the first three years, and 53 percent fail within the first five years. The figures are similar in the European markets. However, the number can be higher during uncertainty, such as global recessions period or the COVID-19 pandemic, for example.
The real question then becomes, “Why do those businesses fail, and how can a new entrepreneur avoid the failure?” Well, there are a variety of reasons why small businesses fail. However, we will mention few important reasons that are considered to be vital. The following section details the top five reasons small businesses and start-ups fail:
No market for their products
The most commonly cited reason for start-up business failure are much more fundamental to what makes a business idea great in the first place, whether the business idea solves the needs of the potential customers. Identifying a need in the market before starting a business is critical to start-up business to succeed. An entrepreneur can have the greatest product in the industry, an effective pricing structure, and a huge budget, but if no customer wants what they are selling, there’s not much they can do to save what is destined to become a failing business.
However, if the entrepreneur has identified a need for his product or service and is catering effectively to that market, the reasons for failure become more diverse. Some risk takers would create a business without the proper research on the needs in the market. An entrepreneur must create a business to solve an existing problem, rather than a fantasy idea.
Lack of enough capital
The second most commonly cited reason why new businesses fail is the lack of having enough capital to continue to operate successfully in the market. This reason isn’t so surprising, given that more than one-quarter of small business owners found difficulties to obtain the funds they need to operate their business.
Similar to not meeting a market need, there is often nothing an entrepreneur can do if their business doesn’t have enough capital to operate. Whether it concerns a failure in raising funds through investors, crowdfunding, obtaining a business loan, or generating their own profit, not having enough capital may not instantly close the business, but it also can at least cause a slow growth by way of limiting marketing, production, and every other critical area of business.
Lack the right team
This third reason is difficult to summarize as it’s so diverse, but it comes down to not having the right team behind you to implement the business idea, and therefore operate a successful business.
Some founders of new businesses find it difficult to have a partner to support them implement or operate their idea. And other entrepreneurs may face a situation where their founding team was not equipped to build the products they needed to launch in the market, which thus leads to failure.
Competition
In many businesses sectors, such as the technology-related industries, competition is high and can often be the reason a start-up isn’t able to grow and stay profitable. However, competition extends to every space and can be a contributor to a potential business failure, no matter the industry. Sometimes, business owners become obsessed with some areas of their business while ignoring what really works for a competitor’s product or service, or what the market needs.
Pricing and positioning
Pricing and positioning the product are consider to be among the major reasons why a start-up business fails in the market. Pricing can be difficult in certain industries, especially software and various services, as there are often little to no reference points for how much a company should charge. Pricing a product too high pushes away potential customers, whereas pricing it too low will prevent it from generating income or turning the business into a profitable one.
By studying the primary reasons why small businesses tend to fail, new entrepreneurs can learn valuable lessons that will allow them to position themselves for success.
Generally, as mentioned earlier, the most common reasons small businesses fail include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.
An entrepreneur must consider the following points when it comes to preventing business failure:
• Create a solid business plan
• Learn from competitors
• Create and maintain good customer service
• Supervise cash flow
• Avoid going into debt
An ideal business plan, aside from containing great sales and marketing strategies, should also have contingency plans that can be utilized in case of an emergency. The business plan should also contain a clear strategy regarding how the business will be able to bring in profit while still having enough funds for business expenses. Business plans should also be sustainable.
Also, a new entrepreneur should learn from other existing businesses or competitors in the market, and take healthy competition as an opportunity to learn and possibly replicate measures to mitigate business failure. New entrepreneurs in the market must view their competitor’s methods as tried and tested methods and could have a higher chance of succeeding if applied to their business.
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