Why DO Businesses Fail? 10 Reasons Why

why businesses fail

It seems we are constantly bombarded with the wondrous tales of start-ups who are smashing past people’s expectations and getting multi-million (if not billion) valuations. Whilst this may be the case for some start-ups, the harsh reality is that 7 out of 10 start-ups fail within ten years.

When setting up a business, whilst it is beneficial to study the reasons that businesses succeed, it can also be beneficial to look at the reasons why they fail.

Key lessons can be learnt from other businesses failures, which can prevent you making the same mistakes in your own venture.

To help you on your entrepreneurial journey, and to help you make it into the successful side of the statistics, let’s look at the top 10 reasons for business failure from the company formation experts: Quality Company Formations.

1. The idea was before their time

Whilst nobody thinks twice now about booking to stay in a strangers home via Air BnB, or taking a trip in someone’s car via Uber, these ideas were fairly radical previously. If 20 years ago such things had been suggested, it would have been looked upon as ‘crazy,’ leading to few (if any) early adopters.

Technology

Some businesses, such as Uber, have also been built relying on others technology- in Uber’s case they required smart phones, with apps and GPS technology – not something that would have been available via a Nokia 3310.

Sometimes business founders have had brilliant ideas but mass society isn’t ready for them yet- in this case it can be tricky to ‘hold on tight’ until they are, ultimately leading to the businesses failure.

Similarly, a business founder may have a great idea, but if the technology required around the idea has not yet been put in place, the idea may fail.

Whilst it may be an option for the business to create the technology themselves, this may come with a hefty price tag or be beyond their realm. It is unlikely Uber could have taken over Apple in developing a smart phone.

2. They run out of cash

Let’s say you sell peanut butter. You have the peanut butter made in a factory, with 30-day payment terms. You then ship the peanut butter to the supermarket, which has 90-day payment terms- suddenly you have a cash flow issue.

Many businesses fail to prepare when it comes to cash flow adequately, especially during times of high-growth, which can mean without external investment they are left high and dry. Planning cash flow and getting extra investment or bridging finance is a must to avoid the business failing.

3. A lack of marketing

Let’s go back to the example of selling peanut butter. You sell the BEST peanut butter in the world. You make the peanut butter, you set up an online shop and maybe even sell in a few stores, but you do no marketing.

While word of mouth holds power, people need to be aware of your offering in the first place – it is very rare for customers to ‘stumble across’ it.

Even if some customers do, in order to grow and scale up your business, marketing is required, particularly in today’s saturated market, where we are bombarded by multiple products a day- on our TV, on our internet browser, via Facebook and Instagram etc.

Customer engagement

As a result, the number of engagements a potential customer is required to have with a brand before they actually purchase it, has gone up. A good idea isn’t enough- people need to know about it and preferably on repeat.

Those interactions with potential customers need to be optimised in order to convert them into actual sales too. Marketing avenues that aren’t creating this conversion therefore need to be re thought.

Many businesses fail, not due to a lack of an offering, but to a lack of awareness about this offering and poorly thought out marketing.

4. Not knowing their customer

Creating general awareness isn’t enough. Businesses who don’t know their customers, or their target markets are heading on a path to failure. You need to know where your customer shops, how they think, how they feel.

Often purchasing decisions are much more complicated than purely ‘does the job’ and ‘good value.’

Knowing what really makes your customers tick is key to not only gaining customers but retaining them. If you’re struggling with this, it may be worth enlisting some expert help, or setting up a focus group to give you a real insight into your customer’s decision making patterns.

5. The wrong team

Even the best business idea could fail without the proper implementation – and who implements these ideas? The team.

Founders should aim to plug skills gaps quickly, hiring those with expertise in the areas they lack it in.

Expertise alone isn’t enough however. Team members need to be dedicated to the company and believe in the business. Often this links to team ethic and creating an environment that nurtures strong teamwork.

Furthermore, the hard work of the team needs to be recognised and the team spirit cultivated, to avoid team members jumping ship when things get tough.

6. Bad leadership

Just as a business needs a strong team, it also needs a strong leader to guide that team.

Businesses can fail without this, as the company begins to lack direction. A strong leader should have a vision of what the future of the company looks like, but must also be willing to pivot and innovate should the external climate change.

Furthermore, starting a business is tough going and there will inevitably be challenging times.

A strong leader or leadership team is require to help businesses navigate through these trickier times, to make sure the company comes out the other side stronger than before.

7. Competition

Competition doesn’t always have to be a bad thing. With particularly innovative ideas, ‘competition’ can actually help you build a category, prove your concept and then build your brand. However, competition can also mean the end for many businesses.

If there is a company doing something better, or cheaper, or more effectively and efficiently than you are, it won’t be long before your business gets swallowed up by the competition.

Listen to your customers

To prevent this, listening to what customers want is key – even better than that, predicting ahead of time what customers needs will be and providing a solution they hadn’t even considered, will keep a business one step ahead of the competition.

Sadly, many businesses are too focused and stuck on their current offering to expand beyond this.

8. Lack of unique selling point (USP)

It often isn’t enough for a business to merely solve a problem. A toothpaste company could launch, solving the issue of bad breath and plaque, but with so many well-established brands they are unlikely to last very long.

Each business needs to have a unique selling point (USP), which they also have to be able to effectively communicate to the customer. This doesn’t mean you have to be the cheapest- maybe your business provides a unique ‘extra level’ of service that comes at a premium for example, or perhaps you’re more expensive, but quicker.

Add value to the customer

Another way of thinking about this is questioning how your business adds value to the customer. It is companies without this USP and that fail to add value that struggle to create room in the market for themselves, and often ultimately fail.

9. External factors

Though rarely the true cause, occasionally it is external factors that can lead to businesses failing.

Laws may be put in place restricting certain activities or onerous requirements may be put in place in order to keep trading. This does not always have to be the end for a strong business start-up however.

Whilst Uber has been banned in many countries around the world, it has managed to not only over turn these verdicts, but it has also expanded globally in order to ensure the risk is spread.

Companies who find themselves in the firing line from external policies need to be agile and to move quickly in order to discover new ways of utilising their skills and value proposition.

10. No long term plan

planning

A business needs to have long term and short term plans and strategies in place, in order for the business to not only grow, but keep going.

A lack of short term planning can lead to issues, such as with cash flow (mentioned above) and a lack of long term plans can mean the business doesn’t grow, eventually being swallowed up by the competition.

Whilst these plans may have to be amended or altered along the way, it is important to have them there in the first place.

Remember, that one failure doesn’t mean the end. Many entrepreneurs had multiple attempts at starting a business before they struck gold and it is possible to reincarnate your business.

Being an entrepreneur isn’t an easy journey, but if you stay focused on that vision and work hard towards it, you can push past the difficult times and create a successful venture.

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