5 Reasons Why Startups Fail

According to the United States Small Business Administration, around two-thirds of small businesses fail within 10 years of their inception. The reasons for so many small businesses closing their doors are myriad and can range from voluntary closure (i.e. the business owners’ no longer wanted to keep their operation going) to bankruptcy. Couple this sobering statistic with the recent economic downturn and this can seem like one of the worst times in history to start a business. However, that couldn’t be farther from the truth.

The average interest rate on a small business loan is at one of its lowest levels since the SBA came into existence in 1986. The real estate market bottoming out means that commercial real estate no longer comes at a premium. There may never be a better time to snag a storefront, and the misfortune that befell other business owners translates as cheap prices on initial materials to someone looking to start their own company.

Regardless of advantageous timing, there is still that harrowing statistic. New businesses fail more often than not. So, if you are starting a business, then you must learn from the mistakes of those who came before you. To get you started, I’ve compiled the top 5 reasons that most small businesses fail below.

Your Product Is Trying To Create a Need Rather Than Satisfying One

You’ve no doubt seen TV infomercials for a product like this: A commercial for a completely unnecessary (and often overpriced, more on that later) product that leaves you saying “Who actually wants this stuff?”

Just because a product is cool, new, or interesting, doesn’t mean anyone actually wants it. You should ask yourself why someone would want to use your product before you invest time and money into starting up.

Your Catering to a Niche that is Too Small

Okay, so you’ve formulated a product that someone has a need for. Now, how big is your market? Is it large enough to sustain your company? If the answer is no, you may want to reconsider your idea. Catering to an audience of one is a surefire way to fail.

Your Pricing Point is Hideously Out of Whack

You have a real product with a substantial audience. But how much are they willing to shell out for it? Deciding how much you should charge for your product is a notoriously finicky process. Charge to little and you’re leaving money on the table that may hurt you down the road. Charge too much and customers will balk.

The solution to this is to never be afraid to mess with your pricing. Try numerous pricing levels and ask for feedback to find your sweet spot. Keep in mind that no one is ever going to complain that your price is too low (except your employees or investors). If a price seems too high, try throwing in trinkets and freebies to sweeten the deal before you slash prices. It may take a lot of time and effort to find your price range but having your business operate at full steam while you work everything out will be worth it.

Your Marketing is Ineffective or Nonexistent

To put it simply, it’s impossible for a customer to want/buy your product, if they don’t know it exists. Many small businesses try to operate with a Field of Dreams mentality (“If you build it, they will come”). Unfortunately, for most businesses this simply isn’t true. Getting your product in front of potential customers is, arguably, the most important thing a small business owner can do. If you fail to reach your audience, you will not succeed.

Of course, all of these problems usually stem from…

Not Having a Business Model

Before you receive any investments, spend any money, or create any products, you need to have a plan to take in more money than you are spending. If you don’t plan to have more in the revenue column than the expense one, chances are you won’t. Unless you have a fondness for red ink, a business model (that includes hard data such as prices, marketing and overhead expenditures, and projected units sold) is absolutely essential.