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Top 5 Reasons Small Businesses Fail

Learn how you can weather the hard times and avoid becoming a statistic.

Grasping the statistics regarding small business failure rates is a slippery endeavor. The sobering data indicates that most new businesses will fail in their first year, and of those that do survive to see a second year, most will ultimately call it quits by their fifth year.

Rather than wrack your brain over which statistics to believe, the more important matter is to understand why small businesses fail and what you can do to keep your online business from following in those fatal footsteps. Here are five of the most common reasons small businesses are failing, and tips on how you can keep your business from joining the ranks of the insolvent.

Reason No. 1: Not understanding the target market

Your product or service is great—according to you, that is. However, as you begin your entrepreneurial endeavor, do you know how many paying customers would agree with your glowing self-assessment? Well, without knowing to whom you’ll sell, and how often you’ll sell to them, you’re lacking an objective approach that can keep your online business buzzing along after the first month or so.

Without knowing to whom you’ll sell, and how often you’ll sell to them, you’re lacking an objective approach that can keep your business buzzing along after the first month or so

Here’s how to avoid this first stumbling block that trips up small businesses:

  • Identify who is buying products or services like yours (this is your target market) and understand their wants, needs and limitations regarding what they’ll pay.
  • Determine the level of ongoing demand and growth potential for your proposed product or service by reviewing other businesses that are already serving this market.
  • Most important, explore how your online business will be different from the others, thereby identifying how you’ll be able to attract customers away from the competition to establish and sustain your sales projections.

Reason No. 2: Lacking a financial plan

As the old adage goes, “You have to spend money to make money.” Following that proclamation, it’s critical that you have a solid financial plan in place that provides for your startup investment as well as ongoing injection of funds to continue operating your business.

Most analysts agree that small businesses won’t see real profit for a full year, at the earliest. Here’s what you’ll want to do to ensure you’re on solid financial footing:

  • From your market research, determine what you’ll need in product and operation overhead to launch your business. You’ll need to make this investment up front.
  • Identify the source of your first year’s worth of capital income (your own money, money from investors, business loans, etc.), and be sure you’ll have that available as you need it. Avoid reliance on “immediate profits” to run your business at the outset.
  • Develop a reliable method to keep track of your financial activities. Whether you do it yourself or hire someone else, you’ll need a daily view of the financial health of your business to know if you’re on the right track and performing to plan.

Reason No. 3: Using a poor pricing strategy

Many new businesses jump into the fray by offering low prices before determining if they can collect a profit from each sale. This is usually a result of underestimating investment and operating costs as well as not looking ahead at the costs of business growth.

Low prices are definitely a good thing to offer customers, but never at the expense of your business’ financial solvency. Consider these tips to avoid pricing yourself out of business:

  • First, be sure you’ve completely accounted for all of your costs, inventory, equipment, third-party services and so on.
  • Return to your market research to ensure the product or service you’ll offer can be competitively priced, while still allowing you profit. If not, reconsider your approach before you invest further in your endeavor.
  • Determine your method of delivering value to customers such that you can possibly charge more than your competitors, if what you’ll sell offers more of what your customers desire.

Reason No. 4: Doing it all by yourself

You needn’t commit to an employee, but you can sometimes find folks to help you on an hourly basis, as you need them

Of course, entrepreneurs are self-motivated and overflowing with the energy to run their businesses from top to bottom, front to back, all by themselves. The problem with running a business entirely on your own is that you’ll risk burning out, you’ll lack having an objective view of your business, and you might lack the needed skills for one or more aspects of your business.

Avoid wearing too many hats by working with others. You needn’t hire employees right away (that’s another expense that is often difficult for starting businesses to afford), but there are ways to get the help you need:

  • Seek a mentor for initial guidance. Chances are you know someone who’s already running an online business. Start there.
  • Talk with family and friends about their views and perspectives. Even though they might not be business people, they’ll likely have some insight that could be of use.
  • Hire help on an “as needed” basis. You needn’t commit to an employee, but you can sometimes find folks to help you on an hourly basis, as you need them.

Reason No. 5: Being in it just for the money

While it might seem counterintuitive, going into business for the sole purpose of making money is what often trips up many entrepreneurs. When you’ve decided you’ll go into business for yourself, it’s often because you want to escape a daily grind, to have more meaning to what you do each day, and to improve or otherwise impact the lives of others.

Those are sound and noble reasons to start your online business, but if you then only focus through the prism of how much money you’ll make, you’ll risk derailing your natural motivations. Instead, focus on your passions, your dreams and what you believe you can deliver to others. Love what you’ll do first, and the rest will take care of itself. You’ll be driven to make your business customer-focused, you’ll seek out talent and advice to help you stay on a correct course, and you’ll enjoy “going to work” every day.

About the author

Dennis L. Prince
Dennis L. Prince has been analyzing and advocating the e-commerce sector since 1996. He has published more than 12 books on the subject, including How to Sell Anything on eBay...and Make a Fortune, second edition (McGraw-Hill, 2006) and How to Make Money with MySpace (McGraw-Hill, 2008). His insight is actively sought within online, magazine, television and radio venues. Opinions expressed here may not be shared by The Online Seller and/or its principals.

  • CincoPicos

    I read with interest your comments on Why Small Businesses Fail.  This is good advice for those who sell general merchandise but what about those who sell collectables?
    It is another world.  Selling a DVD or a pair of Sunglasses is not exacly like selling a Morgan Silver Dollar.

  • Izzywizzyee

    This is good advice. As a second time around retail entrepreneur I learnt a lot from my first business that I can apply to the second. I hear many people complaning of lack of sales but how much of this is to do with step 1 of this advice – do customers actually want the goods you are selling? It still amazes me how many people don’t check  out the demand before starting their business

  • Anonymous

    These are
    the common mistakes that many sellers do without knowledge/ intention. The one
    best way of avoiding these mistakes- hire social media assistants for your
    business. They will create a profile for you in sites that are related to your
    products /services, engage with your customers, promote your products thereby
    helping you to see more sales.

  • Not investing in social media is another reason businesses fail online. It can easily take one or two years to see the results but every business must investin in social media in order to achieve success.

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