The Top 6 Reasons Small Businesses Fail, And How To Avoid Them

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On the average, up to seven out of every 10 businesses close down within their first five years. While there are a wide range of reasons for business failure, some obstacles are far more common than others.

Based on a post-mortem by founders and investors of over 200 startups that failed, this article focuses on six of the top 20 reasons that lead to start up failure, and ideas on how to avoid them.

6) Ignoring customer feedback

Fourteen percent of the failed businesses believe there were times when listening to their customers could have led to critical changes that may have saved the business. But rather than listen to feedback, they were too focused on their own vision for the business.

If you want your customers’ money, then you have to give them what they want, and not what you want. Most times, your product design and business plan can significantly change when you get input from your present or target customers.

The formula to avoiding this pitfall is to be open-minded, flexible and to seek honest and critical feedback.

5) Poor marketing

“If a tree falls in the jungle and nobody heard it, did it really fall?” If you have a product that people don’t know, do you really have a product?

Entrepreneurs can often be focused on production and creation, and be far less interested in marketing and sales. In their minds, they think: “If I build a very good product, the customers will come.” This rarely happens in reality.

One key reason for this pitfall is poor skills in marketing. Some entrepreneurs are either afraid of selling, or they just don’t know how to do it. Get around this problem by learning the skills. (This a helpful article on marketing). Another option would be to partner with or employ somebody who is a good marketer.

4) Pricing and cost issues

Eighteen percent of the businesses that failed bled to death. They were losing more money than they were making and, often, didn’t know it.

Setting the right price for a product or service is often considered a dark art. On one hand, you need to set a price that is high enough to cover your costs and keep your business profitable. On the other hand, you want your price to be affordable enough so you can attract customers.

Balancing these two requirements can be a big problem, and those businesses that can’t do it right end up going out of business.

One way to get around this problem is to be very clear about the customers you’re targeting, what they value, and how much they’re willing to pay.

3) Getting outcompeted

Business can be a war, and most times, only the strong and adaptable will survive.

Competition is a huge threat to many businesses and there are several different ways the competition can crush you. They can outspend you on marketing, poach your employees, or win over your customers. All of these are realities of doing business.

One way you can limit this threat is to define and build your competitive advantage. What is that thing you can do or provide to customers that most of your competitors cannot? As Jack Welch, the legendary CEO, once said: “If you don’t have a competitive advantage, then don’t compete.”

Another way to limit the threat of competition is to find ways to make your customers loyal and committed to your business.

2) Having the wrong team

You may have a brilliant business idea, but if you don’t have the knowledge, skills, experience, contacts or resources to execute that idea, then you don’t have a business.

About one-quarter of the failed businesses in the post-mortem either didn’t have a well-rounded team, or had a team that wasn’t compatible and couldn’t make decisions.

The first step to avoiding this pitfall is to be clear on the gaps you have in terms of knowledge, skills, experience and contacts in your business. Remember, you can’t do it all alone. So, you can either bring in capable people as partners, or you can hire them as employees.

1) No market need

A whopping 42 percent of startups in the post-mortem failed because there was no market need for their products.

No matter how affordable, convenient, top-quality or technologically-advanced your product is, there’s still a good chance the market doesn’t need it. The best way to reduce the effect of this shock is to validate your idea. Always start with a pilot, beta or sample version of your product to gauge the market’s reaction. Based on the market feedback, you can tweak the product until it fits the market’s needs. Only then can you go full-blast and roll out your big production budget.

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The lessons here can help you reduce up to 60 percent of the most common reasons businesses fail. There’s no reason to make  the same mistakes when you can learn from the experiences of others.

2018 is an opportunity to grow your business through deep insights from industry leaders. But how do you access such information?

As part of its new campaign, British Council Enterprise is connecting entrepreneurs with digital skills, industry connections and top-class business resources they need to start and scale their businesses.  Enjoy our special British Council Enterprise content here. Stay up to date on new British Council Enterprise projects on the Enterprise Projects page.

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