Businesses come and go – we see them opening up, struggling for a few years and closing their doors. We might even hear that they offered something we were searching for – after they’ve closed. But why do they fail?
According to the National Federation of Independent Business (NFIB) in the U.S., over the lifetime of a business, only 39 percent are profitable, 30 percent break even and 30 percent lose money, with one percent falling in the “unable to determine” category.
Many research organizations suggest the leading cause of business failure is undercapitalization or lack of cash a business needs to provide the owners with the time to get to profitability.
My experience with businesses and owners over the years suggests that it may be the case that businesses run out of money and are forced to close, but the underlying causes are usually different. Here are some of the root causes of failure:
Lack of clear vision
Many ventures are started because someone has an idea that they could make a lot of money opening a business. This means they don’t have to work for anyone else, can make more money than they would as an employee and can control their future.
The lack of a concrete vision about how this is going to transpire, along with a lack of business experience or skills necessary to ensure success, are paramount to the business failing.
There are a variety of tools business owners can use to ensure they create a vision of where they’re going. These include things like the One-Page Business Plan, working with organizations that help startups, and even business colleges or universities that have students eager to work on research projects.
Michael Gerber, in his book The E-Myth Revisited, suggests entrepreneurs need to think about what the business is going to be in five, 10 or 25 years and start building towards that.
Lack of value
Often entrepreneurs see someone else doing something and figure they can do it just as well. The problem with this model is that the established business already has customers. The value proposition of the new business isn’t great enough to ensure customers flock to them.
Any business has to know why its product is so much better than its competition. What are you doing differently that’s going to ensure customers want to buy from you? What is it about what you’re selling that makes your customers’ lives better? What pain are you relieving or what pleasure are you stroking for your customer?
A business could struggle for years without knowing what went wrong or considering the opportunity costs associated with starting a business.
Not understanding clearly the need for a strong value proposition and the inability to convey the value to the customer has been the downfall of many businesses.
Lack of business knowledge
I’ve worked with many highly-skilled businesses owners. The problem arises when they become successful as a result of their skill and their business grows. The skills that enabled them to be successful as a very tiny business have been outgrown by their success.
In addition, many entrepreneurs are blind to their lack of knowledge in areas that could lead to success. We have technicians starting businesses because they know everything about how to build a product or provide a service. But they don’t know how to communicate with the customer, price the product or lead employees.
There are only so many things a business owner can do in a day. I regularly talk to owners who work 50, 60, 70 or more hours in a week.
These people often tell me that if they don’t do something, it won’t get done. That nobody can do it just like they can or that they feel they need to lead by example by working harder than anyone in the company.
The problem is these owners become burned out. They become overwhelmed by the never-ending work pile. They feel aggravated when staff ask for time off for holidays or family life because they don’t give themselves that time.
Once burnout sets in, entrepreneurs start making decisions that aren’t wise. They fail to hire staff who can bring skills they don’t have or if they do hire these people, their micromanagement overrides decisions that could improve the business.
This lack of leadership paralyzes the business and leads to narrow-sightedness, resulting in failure over time.
Every successful business has one thing in common: they connect with their customers and provide a product or service the customer will exchange for money.
The road to failure is littered with businesses with great products that couldn’t get the message to prospective customers that they had something of value.
Sometimes owners think advertising is too expensive so they fail advertise to reach their customers. Some owners do advertise but are pouring money into the quicksand of conventional wisdom that suggests you automatically get results if you advertise.
The problem with most advertising is it’s not measured. We advertise our product or service and don’t determine if we get customers or sales as a result.
With great advertising comes great results. The secrets of great advertising include knowing your target market and figuring out the message that’s going to reach that market. If you can do that, there’s a good chance your business will succeed.
In order for a business to be successful, owners need to have a clear vision of where they’re going and have the skills or team to take them there. If they have a product or service that’s priced for profit and seen as valuable to customers, and the business can reach those customers and clearly convey that value, success is almost guaranteed.