Why DO Businesses Fail? 10 Reasons Why
Not everyone who starts a business knows how to run a business. Starting a business is the easy part. Keeping a business running is where small 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, what percentage of businesses fail? The harsh reality is that the statistics are not favorable with seven out of ten businesses failing within ten years.
When setting up a business, whilst it is beneficial to study why businesses succeed, it can also be helpful to look at why they fail.
Key lessons can be learned from other business failures, which can prevent you from making the same mistakes in your own venture.
To help you on your entrepreneurial journey, and to help you make it into the victorious side of the statistics, let’s look at the top 10 reasons why a business fails.
1. The idea was before their time
Whilst nobody thinks twice now about booking to stay in a stranger’s home via Airbnb 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.
Some businesses, such as Uber, have also been built relying on other technology- in Uber’s case, they required smartphones, 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 business failure.
Similarly, a business founder may have a great idea, but if the technology required around the concept has not yet been put in place, the picture 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 smartphone.
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 for cash flow adequately, especially during high growth, which can mean that 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 infrequent for customers to ‘stumble across’ it.
Even if some customers do find you by accident, to grow and scale up your business, marketing is required.
As a result, the number of engagements a potential customer must 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 optimized to convert them into actual sales too. Marketing avenues that aren’t creating this conversion, therefore, need to be rethought.
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, and how they feel.
Often purchasing decisions are 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.
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 ethics and creating an environment that nurtures strong teamwork.
Furthermore, the team’s hard work needs to be recognized 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 the company’s future and 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 required to help businesses navigate through these trickier times to make sure the company comes out the other side stronger than before.
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 create 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 critical – 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 forward from the competition.
Sadly, many businesses are too focused and stuck on their current offering to expand beyond it and remain relevant with their customers.
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 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. Companies without this USP fail to add value that struggles to create room in the market for themselves and often fail.
9. External factors
Though rarely the actual 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 to keep trading. This does not always have to be the end for a strong business start-up, however.
While Uber has been banned in many countries around the world, it has managed to overturn these verdicts and expanded globally to ensure the risk is spread.
Companies that find themselves in the firing line from external policies need to be agile and move quickly to discover new ways of utilizing their skills and value proposition.
10. No long term plan
A business needs to have long-term and short-term plans and strategies in place for the company to grow and keep going.
A lack of short-term planning can lead to issues, such as 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 vital 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.