5 Reasons for Small Business Startup Failure

By Eric Dickmann

April 2, 2019

Competition, People, Pricing, Product / Market Fit

Launching a small business startup isn’t easy and the statistics reflect that many businesses quickly fail. Big ideas are often the launching point for a new business but success is the result of good execution, not just good ideas. The risks are high which is why having a strategy in place from the beginning is so important.According to the Small Business Administration (SBA) Office of Advocacy’s 2018 Frequently Asked Questions, about 80% of small businesses survive the first year. That may surprise you considering we often hear many businesses fail within their first year. However, the story gets worse. Only about half of small businesses survive past 5 years. By the 10th year, only 1/3 of those businesses will have survived. While those odds may seem much better than winning the lottery, they represent a tremendous amount of the money and effort going into business ventures that ultimately fail. These failures often times wipe out savings and strain relationships.

Business Survival Rate

So why do small businesses often fail? According to CB Insights, which analyzed over 100 businesses, five main reasons surfaced that lead to failure:

No Market Need

As an entrepreneur building a small business startup, it’s easy to get excited about a business idea. Something hits you one day and you think about turning it into a business. The problem is that often times, adequate research isn’t done into evaluating the market need. Why does the world need your product or service? Is there a market but it’s being underserved or are you trying to create a market that doesn’t exist?

You see this often with restaurants. Someone wants to own a restaurant and sets up shop but the location is wrong for the kind of food being served or the concept is confusing. I remember a restaurant going in near me but their signage looked like a kids toy store. People driving by would have no idea it was actually a restaurant. When I finally tried it, the food was unremarkable. Taken together, the restaurant was doomed and sure enough, it closed. You need to understand your product-market fit and make sure your product is meeting an unmet need.

Ran Out of Cash

Opening a new business can be expensive. There are the startup costs, purchasing equipment, hiring workers, advertising and more. It’s common for entrepreneurs to significantly underestimate what it will cost to get started. Even home or internet based business have startup costs. And if you’re working full time on the new venture, you’re eating into saving while waiting for the revenue to start rolling in.

Business loans are difficult to obtain and financing through credit cards or other high-cost sources of capital can bog down a new business with excessive debt. More than one-quarter of small business owners say they aren’t able to obtain the funds they need to operate their business, according to a National Small Business Association study. Without enough money, businesses often fail before they ever have a chance to get traction.

Not the Right Team

Whether you’re the sole owner of your company or in partnership with others, having the right team of people in place is critical to a business’s success. Running a business is a skill and many entrepreneurs are newly independent. They are running a business for the first time and learning as they go. Mistakes happen which can cost the business time and money. Having mentors or experienced partners certainly helps. As does hiring the right team of employees that will align with your organizational culture. People are the face of your business to the customer and it’s critical to build your business from day one with this in mind.

A Challenging Competitive Landscape

It’s pretty rare to have a business idea that is so unique that you’re attempting to build out a completely new market. There are certainly disruptive ideas but even those are addressing an existing market, just in a new way. That means you’ll most likely have competition and it’s important to understand your competitors. A small business startup must learn from what competitors are doing right and what they are doing wrong. Don’t fall into the trap of believing your product or service is better just because you want to believe it is. Well established competitors can be tough to unseat. Often your best strategy is not to take them head-on but to find a niche and successfully serve that niche better than your competition. Trying to be all things to all people usually means you’re not serving any market well.

Understand your competitors and acknowledge your weaknesses. Focus your efforts on where you are strong and where they are weak. And if there is too much competition, consider carefully what you could bring to the market that would offer a path to success. Ask anyone in real estate, when there’s so much competition, it’s difficult to stand out and be successful.

Invalid Pricing Assumptions

It can be complicated to figure out how to price your product or service. Do you want to undercut your competitors and become the low-cost provider or sell a premium product or service where you can charge a higher price? Often times the decision depends on the market and what you bring to it. Where businesses get into trouble is trying to charge a premium for something the market views as a commodity or pricing a product low to generate sales but not profit.

Not far from me was an intersection with gas stations on 3 of the 4 corners. Each was a different brand and all had convenience stores. I drove by the intersection last week and noticed one had closed. It was the only 1 of the 3 that charged a premium for using credit cards for payment. While each advertised gas at approximately the same price, the reality was that one charged 5 cents more per gallon when paying by credit card. The business offered nothing above what the competition offered but was charging a premium price. The marketplace spoke and the business is now defunct. A classic example of not understanding your product, it’s pricing and the competition.

About the author

Eric Dickmann is the founder of The Five Echelon Group, host of the weekly podcast - The Virtual CMO, and a CMO On Demand for a variety of small and midsize companies. An executive leader with over 30 years of experience in marketing, product development, and digital transformation, he has worked with large, global companies and small startups to develop and execute marketing strategies and bring innovative products to the market.

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