One of the most eponymous statistics that bombard new entrepreneurs is that most startups fail.
According to Forbes, about 80 percent of companies survive their first year of operation intact, but USA Today notes that the amount of businesses that make it past their first year of service drops drastically to 20 percent. Small businesses face an uphill battle if they are to survive in the long term.
There are a variety of reasons for startups that fail in their first year of operation, however; many of them fall prey to the same pitfalls and mistakes that have claimed thousands before them. The reasons why most startups fail is often unique to a company or industry. Overall, however, they do share some traits in common that can impact a new business negatively, given a chance. Among these are:
A Saturated Market
According to Investopedia, market saturation occurs when a service or product has reached its maximum level. What market saturation means for businesses is that consumers either already have enough of the product or don’t want the product. The economic law of supply and demand dictates that in a situation like this, the price of a product will decrease, which can mean the entire business going under. To get over a saturated market, a successful startup must innovate, either by improving the product or service or by offering a niche solution to consumers.
Small businesses already find it challenging to compete in an open market when large companies dominate the industry. Chain stores and franchises can do the same things small companies do but at a fraction of the risk. To compete against these massive corporations, a successful startup must leverage the things that make it unique. They need to market heavily to the local area, depending upon the personality of their business to drive sales.
Poor Pricing Models
Proper pricing, as the Houston Chronicle explains, can dictate whether a consumer finds a product desirable or not. Developing an appropriate model of pricing can only come from monitoring the state of the market and the demand for commodities. Weak pricing can leave a business reeling from losses or not generating nearly as much profit as it should be seeing.
Bad Management Decisions
Management of a business comes with taking responsibility for decisions that impact the company’s growth and development. The Chartered Management Institute (CMI) discovered that, in the UK, most businesses struggle because of poor management. Everything from cash flow to logistics come back to making the right management decisions at the right time. A string of bad decisions could potentially lead a business to shutter.
Employees are the front line of a successful startup. Having the right employees for the job and the right mix of hires for a wide range of tasks is crucial to the success of a small business. If the employee culture is undermined by insubordination, it can quickly overflow into outright hostility for customers. Having a homogeneous employee culture can be an essential factor in the success of a business, as Inc. mentions. Conversely, hiring the wrong employees can spell disaster for a business.
Low Demand for a Product or Service
Even though a product might be in high demand when a business opens, there is no guarantee that customers will continue to want the product. For businesses that have a downturn in their product sales, the mantra they should ascribe to is ‘innovate or die.’ Companies that can’t refresh their product or service can face closure very quickly. The market is dynamic, but even so, a one-trick-pony doesn’t stand a chance in an ever-evolving consumer industry.
Poor Financial Choices
New entrepreneurs can fall prey to not realizing that budgeting for a business is different from budgeting for a household. Some professionals overlook simple things like accounting practices and bookkeeping, notes Business Dictionary. The result is that the small business gets audited and ends up paying out more than their fair share in penalties to the taxation office.
For a business to succeed in the long term, it must be adaptable. Inflexible business practices might seem like a good idea to the new entrepreneur, but they complicate matters very quickly. Most businesses and individuals prefer a more straightforward method of doing business, and many seek to find the simplest way of getting things done. A company that unnecessarily complicates its procedures will quickly find itself losing out on customers who have found a more natural way to do things.
Lack of Passion
The main reason many entrepreneurs start a business is that they see a need and fill it. However, being passionate about a business is a different matter altogether. Businesspeople who are passionate about their industries make for more engaging partners, leading to a successful startup idea. It takes more than the passion for starting a business, but being passionate is still a crucial ingredient to the creation of a successful startup.
Avoiding Small Business Failure
Any or all of these may apply to a business, yet the company still may succeed. However, in the firms that do go belly up, one or more of these factors are usually the culprits. For new entrepreneurs, many of these can be easy to overlook which ties into why most startups fail. What a business owner might mistake for a clear operating procedure, can easily be seen from a customer perspective as inflexible business practices. Entrepreneurs must step back and have some perspective when it comes to their business to keep it from failing like so many others have before.