Why Businesses Fail and What to Do About It

Depending on who you listen to, somewhere between 75% and 90% of businesses fail within the first 2 years. Others (specifically the US Bureau of Labor Statistics) say that more than half will make it through that first two years, with as many as 30% still existing at the 10-year mark. A little more positive, but put on the glass-is-half-empty-glasses and that’s still pretty low odds of long-term survival.

The enduring question is: why? Like everything in life, the answer isn’t exactly straightforward, but there are some common themes that emerge when you look at the businesses behind the statistics. These include:

1. The product or service sucks. And by ‘sucks’ I mean there is no market for it. No one wants to buy it. There have been many ideas that looked great on paper but turns out no one wanted to pay money for them. Does anybody remember Webvan or Boo.com?

2. The product or service is not sufficiently unique in the market place. Do we really need another generic pizza place, dollar store, or coffee shop? The general idea may be a good one, there may be a market for it, but if a company can’t differentiate itself, the story generally does not end happily. This doesn’t mean that you should stop looking into finding a coffee supplier Shrewsbury for example if you’re considering opening a coffee shop of your own. Just think of ways that’ll set your business apart from the rest.

3. The business model doesn’t make sense. In other words, the combination of cost, pricing, volume and the people running the company are set up so that the business can’t be successful. I once did some consulting work for a company that was losing money despite what appeared to be healthy revenue numbers. Some operational analysis and costing revealed they were selling their product below cost. Worse still, they were incenting their salespeople purely on volume, and so were effectively paying bonuses to drive behavior that was putting the company out of business.

4. Some combination of all three. It is rarely the case that only one of these factors is the problem; more frequently it is the interaction among them that results in business failure. Webvan (which allowed customers to do their grocery shopping over the internet and have the groceries delivered) expected a huge and immediate uptick in customers ordering food online for home delivery. In anticipation of that, they spent a few hundred million on store and delivery infrastructure, using companies like this London courier service to ensure food gets to their destination on time and intact. When the uptick was slower than planned, out the door they went. Was there a market for the service? Yes. Was the business model sized appropriately? No. But fast-forward to today, and you find Amazon is restarting that model.

The good news is that there is something that can be done to address all of these challenges. While it doesn’t guarantee success, it can improve the odds considerably.

1. Understand what the customer wants. This means engaging in significant dialogue with your potential customers before the business is launched. If the launch has already happened, this means the same thing – in-depth communication with your customers so you can tailor your product or service to the demand in the market place. High tech types like the term ‘pivot’ when a company that thought it was in one business changes direction to address a different need. It is often described in a somewhat flip manner, without the customer conversations to back it up, but the concept is a powerful one.

2. Create differentiation for your product or service. This requires understanding what it is about your company that offers something unique to the customer. Unique could be the low price (think Wal-Mart), unique could be different customer experience (was I the only one that thought yet another coffee chain was the last thing the market needed? Starbucks just wouldn’t listen), and unique could be high quality (think Louis Vuitton.) And don’t ignore the execution of this differentiation, which is another way of saying ‘sales’. Recognizing your differentiator is only part of the process, selling it is just as important. Just because you know why you’re valuable to a customer doesn’t mean he or she knows it yet.

3. Understand your business model. Most entrepreneurs would not describe themselves as ‘detail people.’ Which in my experience can be an excuse for focusing on what you find most interesting and ignoring the rest. A solid understanding of the business model, including what drives profitability and cash flow, is essential to success (unless you’re one of these tech companies that is so hip you can raise millions of dollars without much in the way of details…although that generally doesn’t work out well eventually). The other piece of operations that is ignored at your peril is leadership. Specifically, do we have the right people driving the various parts of the business? Most successful businesses invest in developing their managers (even when the management team is one person.). They learn they grow, they change, and they recognize that operations element is an essential piece of long term success.

Perhaps the hardest part about avoiding business failure is having the honest conversation with yourself (and your team, if you have one), and that starts with two questions:

1. Are we willing to accept that there’s something wrong with what we’re doing?

2. Are we prepared to do what needs to be done to address it?

Dealing with these issues is not easy, and although we often talk a good game about tackling the problems, that doesn’t always translate into the commitment and the effort that is required to actually do something constructive about it.

Written by: Mackenzie Kyle