Why do some small businesses fail while others succeed? We would like to build on the point raised in Mr. Nugid’s article “Avoid These 4 Big Reasons Small Businesses Fail” in Inc. magazine. Plus, we add others we’ve learned based on real-world experience helping small businesses.
Small Businesses Fail due to lack of sufficient capital
We’ve seen small businesses fail for this reason, over and over. It generally falls into two camps: first, a business who has been in business for less than 2 years, and second, a business, who waits too long before applying.
Small business who fail because they have less than 2 years experience
We had a young woman entrepreneur who was struggling with her business. She was profitable, but it was coming at the expense of her salary. So, this wasn’t a long-term solution.
Like most entrepreneurs, she was playing multiple roles. When she was selling, she’d gain clients. But, to service those clients, she’d have to stop selling. Therefore, she was seeing a seesaw effect in her cash flow. The obvious solution was to split the role to ensure constant and predictable cash flow.
You would think this would be a slam dunk, right? Profitable, proof of concept, good personal credit, etc. Wrong. As we’ve discussed, in our post “What’s Holding Women Back”, and several others, we discuss the bias in the banking industry.
New businesses without personal guarantees or collateral will struggle, and women and minority-owned business will struggle more. I wish there were a ready-made solution for this, but there’s not. Maybe this will change as we discuss in our “Small Business is Booming Post”. But for now, you are typically left with two choices, enter the alternative lending market, or provide some personal guarantee.
Small business who fail because they wait too long
We had a client who had an amazing green concept. He secured an initial round of equity funding, but he didn’t use it wisely.
He was an idea guy and had a terrible time focusing. He hated numbers and analysis, which eventually was his downfall. He never took the time to understand his cost structure.
So, his profitability varied wildly from customer to customer. In some cases, it was so bad he was basically paying the customer so that he could perform the service. Unfortunately, we didn’t get to him until he made the biggest mistake possible. He entered the merchant cash advance market.
In our post, “Why You Should NEVER Use Merchant Cash Advances”, we go into great detail about these sharks. But, the moral of this story was that he waited until he was desperate to look for capital. Thus, this is why he failed.
Lack of Addressable Market
Mr. Nurgid highlights this as one of the key reasons small businesses fail. Maybe, that’s because he deals with credit card processing. In contrast, we have not seen this be as big of a factor as the lack of differentiation.
Small Businesses Fail Because of Lack of Differentiation
Now, this we have seen as a major cause of why small businesses fail. We would break this into two groups: first, lack of a clear positioning, and second, poor marketing execution.
Lack of a Clear Positioning
In our post, “4 Simple Steps to Write a Successful Marketing Plan”, we cover positioning in more detail. We also offer tools that can help you build one.
A good positioning defines what’s unique about your brand within a competitive context. It’s a simple formula: For [customer], who are [demograhic, geographic, etc. subgroup], [Business] is the ONLY [category] that provides [benefit]. That’s because of [support point 1] and [support point 2]
For instance, we had a Dermatologist client who was struggling to gain patients. She operated in the crowded cosmetic market, where you can get a Groupon a day for a Botox special.
With physician overhead, they couldn’t compete and win on price. They needed to stand out, or they were headed out of business. So, we started with their positioning.
After much research and discussion, we came up with the following:
For women and men over 40, who want to look younger and more refreshed, Derm A is the only practice in NYC neighborhood, that provides the best quality cosmetic results possible. That’s because we employ only board-certified physicians and surgeons. and these physicians have a long track-record of amazing transformations.
See the difference. People don’t want Botox for $7/unit if they
This is a major problem that causes many small businesses to fail. Small businesses didn’t start their businesses because they had degrees in marketing. So, this shouldn’t come as a big surprise.
Getting your message heard by the right audience is challenging to do on a small business budget. In our post, “5 Ways to Grow Your Small Business Without Spending a Penny”, we discuss some options to consider.
Poor execution generally comes from poor planning. For instance, we had a client who was spending all his money in search and social media advertising. This was a problem for him for two reasons.
First, he was offering services in a very crowded space. In other words, the number of people competing for the same keywords was very high. Second, he was getting a terrible ROI.
While search, Facebook, etc. can be effective, they are usually not efficient spends for small businesses. At $1-$2/click. and standard conversion rates, you are paying $50-$100 per conversion.
After going through the “4 Simple Steps to Write a Successful Marketing Plan” with him, which was much more targeted and less expensive.
On this point, we agree. We just lived through it. Poor hiring can cost you dearly, and waiting to fire them can add to that cost.
This is always a mistake.
According to the U.S. Department of Labor and reported by HR Exchange Network, the average cost of a bad hire is at least 30 percent of their first-year salary. In other words, a bad mid-level hire who makes $75,000 per year will cost you $25,000 and who knows how much wasted time. Let them go.– Inc
For instance, we had a client who kept a toxic employee for too long. This person caused several strong performers to resign. So, not only did they waste his salary, they had to recruit and train several new people.
Small Business Fail by Scaling at the Wrong Time
This is an incredibly tricky situation. If you build scale too soon, you can burden yourself with unnecessary costs. But, if you scale too late, you can burden yourself with unnecessary costs due to overtime and inefficiencies. So, when is the right time to scale your business? We share our thoughts and examples in our post “3 Signs that You Are Ready to Grow Your Small Business”.