Common Reasons Why Businesses Fail

Common Reasons Why Businesses Fail

Starting a business is just the beginning. As a business owner, you have to treat your business as a baby every day. And this means nurturing it and giving it the necessary resources to ensure it thrives and ultimately succeed. While no one  starts a business to fail, the data has shown that a greater percentage of businesses fail within the first 5 years. This article addresses the common reasons why businesses fail.

Poor Market Research

For people to buy your product or service, they must need it. No matter how good your product or service is, if people don’t need it, they won’t buy. That is why you must conduct thorough market research on your target market, and ensure there is a need for your product or service.

Researching your market enables you to locate customers, understand the market size. In addition, it will help you to find out whether or not your customers can afford your product or service. Through market research, you may find out the potential customers are small in number, and the R&D cost for such products may be too high for these few customers to cover and make you any reasonable gain. In this case, any business with that product or service will not be profitable and may be dead on arrival. So, ensure that that market data supports your business before you take the jump.


Having a Wrong Business Model

Some businesses fail because the business owners were too optimistic about the prospect of success. Many think if they could develop products or services that people need, with a good website and strong marketing campaign, customers would just flow in. While you may find it easier to achieve sales at first, but as time goes on, it may become difficult to acquire customers or stay in business due to competition or other industry factors affecting the business.

As you will find out, it may be very expensive to acquire a new customer. If you can not acquire a new customer at a lower cost than the value that you get from the customer, your business may eventually fold up. This is because the advertisement and promotion cost will suck up your revenue. For most business owners, problems arise when they do not figure out early the cost of acquiring a new customer. So, as you start out, make it a priority to understand this. You should assess the industry and competition and map out a customer acquisition strategy that will ensure positive cashflow for your business.

Poor Product Performance

If the product or service on offer is not up to market standard, you will suffer losses, especially if there are more competent competitors on the market. This may force you to significantly beat down your prices thereby making the profit margin to be too low to sustain the business. Aside this, you risk making a bad name from the start. And this may make people avoid any future products or services from you. This is why you must think through your product and service offerings before introducing them to the market.

Whenever you find a place to improve, always try to make such an improvement. Don’t let poor customer reception discourage you from continuing business as long as the market data shows that there is a need for your product. A bad reputation can often be fixed. Many companies started with products that didn’t meet the market needs but learned from their mistakes and keep improving it until people finally fall in love with the company.


Implementing Wrong Pricing

Pricing is a very tricky component of any business. So, you must price high enough to get the profit to sustain the business and at the same time keep it low enough to attract the attention of customers. To achieve this, make a thorough calculation and offering that is midway between appealing to customers and having enough to keep the business moving through the initial stages.

Running Out of Funds

Some businesses will start quite well. As time goes on, revenue may starts to dwindle until it reaches a point where the profits can no longer support operations. Regardless of how good your product or service is, if it is not known in the market, you will hardly make any reasonable sales. There are businesses that start small with prototypes of products or services to test the market. Therefore, if you are in this type of business, it is important that you have enough fund to sustain your business through the trial phase.

For some other types of businesses, you may need to test the business and pricing model till you are able to find the one that works for you. Conducting this experiment can take some time. So, you need to ensure that you have enough money to sustain the business.

Having a Poor Team

When it comes to running a business, execution is very key. If you don’t have a good managing team, your business is destined to fail irrespective of how good your product or service is.  An incompetent team will make several mistakes. The team might also conduct poor market research that doesn’t really capture the true landscape of that industry or competition, mistakes in market sizing, or market potential.

In addition, a poor team typically fails to execute even the best laid-out plans in an efficient way. They either execute the plan late or make fatal mistakes that result in great losses. So, ensure that you take good care of this part of your business. In the early stage of your business, you might consider outsourcing some tasks as against hiring a full time employee.


In Conclusion

Finally, there are many other reasons that can bring down a business that is just starting. It might not be any of the points above. But it is likely to involve one or two from the list. So, as a business owner, always conduct in-depth market research at every stage of your business. This allows you to validate your business idea and also gives you a platform to pivot if required.

If you know other reasons that cause business failure, consider sharing them in the comments with other readers.

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About Emmanuel Oluwatosin

Co-founder & Publisher of AfricaX. He is interested in: Technology | Media | Startup | Business | Education. Emmanuel currently lives in Calgary, Canada with his family.

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