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Top 10 Reasons (With Examples) Why New Businesses Fail or Struggle to Grow

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Starting a business is easy – it’s the easy part. Growing a business and keeping it profitable can be hard. In fact the statistics show that over 90% of new businesses close their doors within two years. These are businesses that were started with high hopes and glorious dreams – by people with dreams to have greater freedom, increased income, greater control in their lives, more free time to do what they want, as well as the ability to take holidays on demand and to be their own bosses.

These dreams, for many, die fast because building a business and making it succeed and avoiding the traps and pitfalls and frustrations that come with growing a business defeat lots of would be entrepreneurs.

In this post I have listed ten reasons that business consultants say are the top reasons why new businesses fail, with some examples curated from these sources.

Fear and Confusion

Some people new in business get defeated by a sense of being over-whelmed by the size of the tasks involved in running or building a business. Others by a refusal to master the work of being an entrepreneur and business owner.

There are specific skills to owning and running a successful business that you’ve got to learn as a new business owner. One of these skills is marketing.

So, if you’re new in business, learn these skills; listen to the experts! You can master these skills. You can focus and succeed! If you have to, hire a coach.

As an example, here is a case in point, taken from Michael Masterson’s Ready, Fire, Aim ~ Zero To $100 Million In No Time Flat

“A woman I have known since high school called to tell me about a cosmetics business she was starting. She had spent several years developing her own line of natural skin treatments, and had shared them with others, who raved about them. Encouraged by their reactions, she decided to go forward.”

“She’d spent two or three years and all of her money packaging a dozen products and producing all sorts of ancillary materials. She told me about the new labels she was designing, the contracts she was negotiating, the shopping she was doing for a retail space.

“But have you tried to sell anything yet?” I asked her. ‘Everything’s not about selling,’ she scolded me. ‘When the time is right, my products will sell.’ Because she is a good friend, I kept pestering her, hoping she would do what she had to do to get her business going. But as far as she was concerned, her business was already up and running.”

“She was busy day and night working on it. And she was spending all kinds of money. Eventually, of course, we stopped talking about it. And I sometimes wonder what she could have done with those products she’d created. They were really very good.”

That business didn’t get off the ground of course.

Lack of Capital

Capital comes in three forms: Time, money, and energy. Some people have one or two, but not all three, and they fail because they simply cannot sustain the growth phase of their business.

The growth phase of any business is always the hardest – you need to have cash flow, you need to connect with your market, you need to move fast.

This means that your business involves committing everything you have. You may start “small”, but starting small does not mean going casual about your business, or going part-time!

Here’s another example from Ready, Fire, Aim:

A woman approached Michael Masterson for advice. She was an employee of a company in which Masterson had an interest, and she was a friend.

“I have a chance to have a business,” she explained, almost breathlessly. ‘It’s really crazy!’ She told me that she had always loved women’s accessories, and had dreamed of having her own retail store selling them.

“Out of the blue last week, an old friend called her to say that he was starting a business selling Brazilian-made accessories in the United States, and he wanted her to be his partner.”

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“…I told him that I couldn’t really talk about anything until I’d talked to you first.”

“Let me ask you an important question,” said Masterson. “How do you guys plan to sell this stuff?”

“She looked at me like I was speaking another language. ‘What do you mean?’

“I mean, have you done any thinking or taken any actions that would help you figure out how you can sell Brazilian accessories – who might want to buy them, how much they are willing to pay, what sort of pieces they like?”

“Well,” she said, her smile returning, “We have this.”

What they had basically was a logo, some import regulations, a letter from a real estate agent about renting office space, and a DVD that she urged Masterson to watch.

“Nice,” said Masterson, after watching the video. “What were you thinking of doing with that?”

“That’s what we wanted to ask you.”

What he told them turned their proposed marketing plan on its head – and it involved committing lots more time, much less money, and more energy.

“The catch is that you will have to work a little harder. To start anything new, you have to be prepared to put in both money and time. If you put in less money, you need to put in more time.”

It’s not clear if this lady followed his advice or not, but basically his new marketing plan told them to not start by renting office space. What he told her applies to almost anyone interested in opening up a retail business – that includes any sort of store that sells merchandise, also restaurants, hair salons, day spas, and the like.

  • Don’t rush out to sign a lease
  • Figure out how to test your basic selling proposition. You want to know if there is an active market for your product, at the price you want to sell it
  • If you are able to try out selling your product in various venues, you get three benefits – you discover which of your products sell well in what selling environment and at what price; you learn how to sell your products; you also generate cash you need to run your business.
  • After a year of experience selling your product this way you are able to make other less critical business decisions, for example where to advertise and what type of point-of-purchase displays you should have.
  • If everything goes well for the first year, you now have everything you need to confidently sign a lease agreement.
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Lack of Courage or Commitment

Building a business is always risky. Some people perceive the risk as huge, others see it as a fun hobby, but there is risk. Manage it – and limit your potential losses.

Understand the risks involved and enjoy the process. You will make mistakes. Learn from them and go on.

The example given above is also applicable here. The original marketing plan that the lady and her partner in business had called for a lot less courage and commitment – a lot less time and energy.

They had an ad they would plug, some fancy graphics, and a fancy place to put up some displays. Everybody can do that – and 90% of the time it doesn’t work.

Refusal to select and target an audience

No one can sell their services to “everyone” – a message that goes to everyone is unlikely to create a sense of urgency in anyone in particular. Attorneys focus on one type of law. Physicians specialize. So should you.

In the next example the owner of a new business took a shortcut, before she knew who her target customers were…

“After interviewing one business owner, she shared a story that seemed to be very familiar to us. When first starting her business, she wanted to be conservative with her marketing dollars so she purchased a very cheap list of 5,000 names, addresses, phone numbers, fax numbers and e-mail addresses in a given zip code – no criteria was given.”

“She then used this list to send faxes, e-mails and direct mail. After 3 months of consistently marketing she had received very few responses and no sales. She called in a specialist. She was asked, ‘Who is your ideal customer?’ She indicated the ideal customer would be female. ‘That is it?’ asked the specialist, ‘any female will do? How about a female that is 6 months old?’

“Of course not”, was the answer.

Working with the consultant they were able to determine that the ideal customer would be a 30-60 year old female with a household income of $100,000 or more and would be within a 30-mile radius of the business. And when the numbers were ran again for a new list, there were only 100 contacts within the same zip code she had previously purchased. In other words, 4900 other contacts were receiving information that they were probably not interested in or would not be an ideal customer.

“This time she purchased a list of 2,500 contacts. The list was twice as much and covered 5 zip codes. She had her faxes and direct mail redesigned to appeal to females. She rewrote her e-mail text and got very specific.”

This new business owner then gained over 10 new clients and generated a powerful referral program with her existing clientele.

When starting a new business it’s critical that you create an avatar of your ideal customer. This has the added advantage that your advertising becomes easier. You also get to attract the type of customers that will make your life easier – else you could attract the wrong type of customers and become a slave to them. This is one reason many business owners find they’re working too hard and not enjoying the freedom they desired in the first place.

A good book that delves into the topic of “designing your ideal customer” is Michael Cheney’s The Customer Magnet.

Choosing the wrong audience

A market that cannot or will not pay or an audience that is too small or dispersed is a recipe for disaster. The “poor” desperately need medical, dental, legal and other services, but who is going to pay you?

The same problem exists when trying to reach an audience that is dispersed over a large geographic area and not easily identified.

Again the last example applies to this section. It pays to identify your target market when starting a new business, and focusing your marketing message to attract the most qualified prospects.

Fuzzy or unfocused message

What exact benefits do you provide? To whom? Under what circumstances and at what cost? How can people contact you? Be precise, be clear, and be specific.

One plumber who grew his business from zero to over four million dollars targeted soccer moms from the get-go. When you can create a customer avatar for your ideal customer crafting a marketing message becomes easier. Reaching them also becomes easier because you know where your customers hang out.

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Lack of planning – too many random efforts

Many entrepreneurs try a little radio, a direct mailing, join a service organization, offer free samples, and then report that they have “tried everything and nothing worked”. Pick one, and stay the course!

You become identified with your marketing techniques. Choose a logo, a color scheme, and a marketing technique and stay with it!

This pool service guy who grew his business from zero to three million dollars stuck to pay-per-click advertising (PPC) even after burning thousands of dollars and seeing no results (because his website wasn’t optimized to convert visitors into buyers)

Too much advertising, too little relationship building

Advertising works best for tangible products because customers can see the results. Intangible services are very difficult to advertise and are almost always purchased based on the quality of the relationship.

The more people know you, and the more they know about you and your caring, your professionalism and your quality, the more business you will do. Build networks of relationships!

Today it’s easy to communicate with your customers or clients – via email, social media, etc. Building a good relationship starts with connecting and communicating.

This new business owner did just that…

“One of the business owners we had an opportunity to work with was a brand new business owner. He spent two hours each day adding new contacts to his ACT database. Every month, he would send an oversized postcard to every contact offering a specific offer. He would then spend two hours every day calling those contacts to follow up on the postcard.”

“He had a reason to call and many of the contacts felt they were already familiar with his company. After only one year of doing this, he had over 2,000 contacts in his database. He had generated over $1 million in new sales from this list and created 150 buying customers.”

“When he went to write his sales projections for the next year (based on the 150 customers only) the sales were well over $5 million. In 3 years, he now has a sales staff of 6 and his database has well over 25,000 contacts. His projected sales are $20 million.”

When you’re just starting you have more time than money. Use that time to connect with your customers and prospects. It pays off big time!

Laziness and/or Greed

Your business only exists to serve the customer! You must make a profit in order to continue serving the customer, but service is the key to success. Everything must be focused on that.

The statement, “I want to be my own boss”, or “I want a business that supports me” may be true (and be totally honest and reasonable), but they are a dangerous focus for your business.

Think of your customers first!

That plumber we talked about earlier who built his business from zero to four million dollars in one year, he put superior service before everything else. His reasoning was that if he gave his customers no reason to look elsewhere for the services he was offering his them, they would use his service again and again – and recommend his business to friends and colleagues.

And that’s exactly what happened!

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Having a product or service that fails to produce adequate benefits or fails to serve as promised

Some professionals are incompetent. Some don’t use current technology, or are sloppy in their delivery. Particularly with services, even one mistake will undermine client confidence, loyalty, and trust. Do your best – every time! This is what it means marketing by attraction.

It’s easy to believe that your product or service is the best there is. But is it? You should always build quality control into your business – and it’s easy to do. Get the opinion of other people.

In her book, What Great Brands Do ~ The Seven Brand-Building Principles That Separate The Best From The Rest, Denise Lee gives this amusing but highly instructive account…

“Shaking executives out of their myopia takes some effort. A brand revitalization effort I led for a fast food chain began with a special work session for the executive leadership team. The goal… was to help everyone make an honest assessment of the brand execution as expressed through customer experience.”

“…For this particular client, the tasks involved making a series of restaurant visits with specific instructions to follow. One task was to visit the same restaurant location at various times of day and night, to help the participants assess the consistency of the customer experience. Another task was to bring a friend along on some visits and ask the friend to complete an assessment of the experience, to help the executives see things that an insider might miss.”

“The final step was to visit the restroom at a restaurant and sit on the toilet, to get a truly authentic experience of the facilities. We believed this step – essentially telling the CEO and her executive team to “take a crap” where their customers have to go – would be a real eye-opener, and indeed it was!”

“…The CEO admitted that she usually sampled the company’s food by visiting the drive-thru window. Because her attention had focused on the product, she had rarely been inside their dining rooms and it had been years since she visited a restroom, much less sat on a toilet.”

“By following the detailed pre-work instructions, she and her colleagues had to confront how dirty and unkempt their locations were – a truth they had heard many times before but didn’t internalize and accept until they experienced it themselves…”

You too can institute quality controls within your business, simply by seeking the opinions of your customers and being receptive to the feedback from online reviews. Something as simple as paying attention to what your customers are saying about your business on your Google listing, or Yelp, or Bing etc. is a great start.

In closing, starting and keeping a business running can be hard work, but it can also be fun if you’re willing to “learn the ropes.” This post was intended to show you what mistakes you should avoid, and what to do that you may not be doing, so that you don’t become one of those that made the statistic true that over 90% of new businesses fail within their first year!

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