Steven Tulman
Starting a business is easy. Keeping it alive and ensuring it grows is the tough part. Every month there are over 540,000 new businesses launched as per a 2013 article by Forbes.com. However, the number of businesses that are closing their doors exceeds the number of new businesses being started.
So why do so many businesses fail and how can you avoid the same horrible fate with your business?
A recent study conducted by CB Insights identified the top 20 reasons why new businesses fail. The top three are by far the most common and can be avoided by investing time upfront to properly research your market, your revenue model and how to execute your strategy.
Failure reason #1: Your market does not need or want what you’re offering.
49% of new businesses fail because they do not successfully identify a product/market fit. In other words, no one wants to buy what they are selling. This happens for a few reasons.
- The company targets the wrong audience.
- The product or service does not address a real pain point or problem.
- The product or service addresses a real problem, but that problem is not worth solving or is not worth the company’s asking price.
- The market is not large enough to sustain a viable business.
How can this be prevented?
Before starting a business, time should be spent on researching the market, its size, its needs and pain points, and its ability and desire to invest into whatever solution you intend to build a business around.
Conducting focus groups, market interviews and surveys, or testing your product’s earlier version with members of your target audience are a few techniques that can help you determine if the need for your product exists and how easy it will be for you to sell it once its fully developed.
This research should be conducted with strangers and not friends or family, since they will often times tell you what they think you want to hear or simply support you unconditionally. This can do more harm than good when you are considering starting your own business.
Failure reason #2: You fail to generate enough revenue and run out of money.
29% of businesses fail because they run out of money. A business needs to generate revenue to stay alive and cannot operate without funds. Once the cash runs out and investors refuse to reinvest, the lights go off and doors shut.
Although this can be a result of not establishing the right product/market fit since that will impede on sales growth, this is often caused by failing to identify the right monetization strategy for a business.
As illustrated in this slideshow presentation that I used to conduct a workshop at the Harvard Business School, there are many different types of revenue models a business can choose from. Depending on the nature of your business, target market, competition and various other factors, the best monetization strategy will vary from business to business.
How can this be prevented?
- Identify what elements of your product or service you can charge for.
- Determine who will pay, why they will pay for it and when they will start paying for it. It may not be the end user of your product. In the case of Facebook and other digital and social platform, the end user (us) pays nothing. They profit from businesses who pay for advertising spots to reach the end users.
- Determine what revenue model or models will work best for your target audience. Are you a service based company that charges per project or for your time? Are you a company who charges a monthly subscription or membership rate? Do you charge per trisection. And so on.
- Devise a sales & marketing strategy to reach those who will be paying you for services or products based on the revenue model(s) you choose.
- Allocate the resources needed to execute on the strategy.
Failure reason #3: You have the wrong team that can’t execute your vision.
23% of new businesses fail because they either lack the right leadership and/or because they can not recruit the right people and align themselves with the right partners to execute the original business idea and strategy, and therefore fail to achieve the results they need to succeed.
No one can do it alone. Even the great Richard Branson credits his success in business to his ability to select exceptionally smart and talented people to work with him. After all ideas are usually worthless unless you have what it takes to turn that idea into a real viable business.
How can this be prevented?
By aligning yourself with individuals who have the right combination of knowledge, ability, and motivation you will greatly increase your chances of success. Once you find those people, empowering them with the right tools, and keeping them motivated and engaged is critical to enabling growth in an organization.
At the end of the day there are many factors that determine the fate of a business and the people involved with it. Giving the right attention to these and other critical factors will help improve the odds of success. Going into business is easy. Getting it right takes a lot of the right kind of effort and action.
What do you think is most common reason a business fails or succeeds?
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