Why do businesses fail? And how do you avoid it?

“Everybody” knows that nearly all new businesses will fail. Some suggest that 80% of them will fail in the first year. Others say that a further 80% of them will fail in the second and then third year.

Whilst those statistics may not be correct, other more formal reviews note that 52% of new businesses fail in the first year. That’s still way too many, especially if you consider the fallout: stress and economic hardship for (ex)employees and families, maybe relationship breakdowns and I’m sure you know of more that could be included here.

The real question, the one that should be asked is why do businesses fail? What causes so many businesses, started with such good intent, to slowly (or maybe spectacularly) implode?

There are two things that nearly all business failures have in common. Some have one or the other, others have both.

The first is that the business must deliver something that a market actually wants to buy. It can be a new product, but there must be a demand of some sort, otherwise there is no business.

If offerings are not sold for a fair profit then there are only two possibilities:

  • You sell for a loss or at best break-even in which case you have a charity.
  • You don’t sell any, in which case you have a hobby.

Don’t misunderstand: hobbies and charities are very good to have – unless it is supposed to be a business.

So you have something that a market wants to buy. Now you need to have one more thing: your version needs to be better than every competitor’s. You must be able to point at something that you do that is better than the others – otherwise why would anyone want to buy from you? Have you ever gone shopping (where price was not a factor) and bought “second best”?

Neither has anyone else. So you need to be able to boast about something. That can be quality, speed of delivery, additional features, color range, taste – it just has to be something that you do better than anyone else. It is the reason people buy from you. You may have heard this being referred to as your “Point of Difference” or “Unique Selling Proposition”.

All of that is part one – you have something that is genuinely attractive to a market. Now you need to inform that market. You may well have the best but unless people know about it they cannot buy from you.

Think of ‘marketing’ as a means of educating your target market, of telling them that you can deliver what they want, that yours is better than the others and why, and how they can get in touch with you so they can buy one. You’re not trying to foist something on an unwilling population, you are doing them a good turn by supplying a better solution than the one they have now.

Being able to deliver a message to a market that tells them about a better solution means:

  • Knowing your market. In Houston a few years ago the local paper hired people to sell subscriptions. Most salespeople targeted “people who can read”. One looked at the past results and figured out that people who just moved to the area and newlyweds were a major percentage of new subscriptions, so he focussed on them. That’s how Michael Dell made enough to buy himself a new BMW at the age of 16.
  • Knowing your market’s problem. Those that had lived in Houston for some time probably already had subscriptions, it was the new arrivals and those whose circumstances had changed that now needed to keep up with local news.
  • Connecting to the individual. Knowing this, Dell was able to say “I know you’re new in town, and I know you want to keep informed about your new neighborhood”. He was able to establish a trusted relationship because he understood the market and its needs.
  • He was able to deliver the right message to the right people at the right time and place.

Having the right product or service is the skeleton. Without a strong skeleton the business is basically without form or shape. Educating your market is the rest of the picture: without a good message, well delivered, you may have strong support but it looks a bit ugly!

We’ll look at what makes a good marketing message in the next article, and it may not be what you think.

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