The famous statistic that 80 percent of new businesses fail within five years is a bit of an urban legend. According to small businesses data from the U.S. Census Bureau, 76 percent of small businesses operating in 1992 were still running in 1996. And only 17 percent of small businesses that closed in 1997 were due to bankruptcies.
Most common problems faced by new businesses:
1. Poor Market Research:
A common problem for new businesses is that they overestimate the size of their potential market. All products and services have one or more target demographics. An automatic shoe buffer isn’t going to sell well with 12- to 24-year-old females. It would be much smarter to target 50- to 65-year-old men. Go to the U.S. Census Bureau Web site and see how many older men with salaries above $75,000 a year (more likely to wear dress shoes daily) live in your area. Now you have a realistic projection of the size of your target market.
2. Bad Business Plan:
Writing a business plan will help you focus the mission and scope of your business, figure out exactly how the business will run and realistically project how much money the business will make. A common problem for new businesses is that they rush a product or service to market without a clear focus. The result is that the business owner ends up chasing too many potential markets and new products. At the beginning, it’s much more important to have a single focus with a proven client base.
3. Not Enough Startup Money:
A common and deadly mistake is to assume instant profitability. The experts recommend planning for the worst, meaning at least two years before turning a profit. In your business plan, write up a detailed budget that will sustain you through those lean times. Once you’ve figured out how much startup capital you’ll need in the bank, add 50 percent just to be safe. One way to save startup capital is to start as simply as possible. A common mistake of new businesses is to invest heavily in unnecessary luxuries like fancy office chairs or even an office at all! Many successful businesses begin in the home. Don’t run out and hire 10 employees or launch an expensive marketing campaign. Be patient and start slowly.
4. Charging Too Little:
One of the most common problems of new businesses is trying to beat the competition by offering lower prices. Unless you’re Wal-Mart, this strategy is not going to work. And here’s why. Larger, more established companies save money by purchasing on scale. They’ve learned how to cut costs through longstanding relationships with suppliers and through careful logistical planning. Wal-Mart, for example, can offer low prices because it has exclusive contracts with suppliers. Suppliers give Wal-Mart rock-bottom wholesale rates because they know the multinational chain is going to buy 100 million units.
5. Poor Marketing Strategy:
A common problem for new businesses is to rush into newspaper ads, glossy brochures, billboards and radio commercials. The first consideration should be the budget. You need to figure out how much each type of advertising costs and how many of your potential customers it will reach. Opt for the marketing strategy that gives you the most bang for the buck. Another danger of rushing into an expensive marketing campaign is that you haven’t truly solidified your product, service or business model. Let’s say your marketing campaign is a huge success, driving hundreds of first-time customers to your store. If your employees aren’t properly trained or you’re still getting the “kinks” out of your product, then all of these customers are going to have a lousy experience. And bad word of mouth is the worst kind of marketing.