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Why do businesses fail?
7 common reasons why businesses fail and how to avoid them
If you’re starting a business, you may be wondering how many businesses fail either in the short-term or the long run. A staggering 96% of businesses will fail over a 10-year period of time? And as for the remaining 4%, it does not necessarily mean they succeed – it means that they’ve survived.
So why do businesses fail? What makes one entrepreneur succeed while another experiences business failure? What makes the difference in saving a failing business? Peter Drucker and Jay Abraham, among the greatest business minds of our time, maintain that it all starts with two key factors: innovation and marketing.
But before we go deeper into those two areas, let’s take a look at the top seven reasons why businesses fail.
Why businesses fail
1. Not having an effective business plan
If you don’t have an effective business plan, you can’t properly communicate your vision to your team. Tony Robbins advocates not just having a business plan, but having a business map for entrepreneurs to take their small businesses to the next level.
2. Not understanding customer behavior
You can understand your product or service inside and out, but one of the top reasons why businesses fail is not fully understanding their customers. Once you grasp that your customer’s life is your business’ life, you can truly envision how to succeed.
3. Not managing inventory correctly
It’s astounding how many businesses fail due to inventory mismanagement. Hiring someone who is skilled at inventory management or using a good inventory management software is an easy way to solve this issue.
4. Not scaling properly
Explosive growth can be tempting, but not scaling in a mindful manner is one of the biggest reasons why businesses fail – you have to strike the right balance between growth and infrastructure.
5. Not enough sales
This one is a no-brainer. If you don’t have enough sales, you can’t pay your team or yourself and you cannot grow. Keys to increased sales are confident salespeople, knowing the marketplace and a willingness to delegate.
6. Trying to do it all yourself
Yes, you are an entrepreneur, but that doesn’t mean you have to do everything on your own. If you wonder why businesses fail, you usually only have to look as far as the owner. If they refuse to delegate and try to control everything, it’s quite likely they won’t succeed over the long term.
7. Lack of flexibility
Entrepreneurs who fall in love with a service or product and refuse to change directions when the market demands it are likely to fail. The key to long-term success is flexibility and a willingness to pivot when necessary.
Why do businesses fail? The role of innovation
Why do businesses fail, and what does innovation have to do with business success? Innovation means finding a better way to meet your clients’ needs than anybody else. Anybody can make some money for some amount of time. But if you want to become successful and sustain that success over years and over decades – if you want to build a brand – then you have to find a way to add more value than anybody else in the game. And that comes from constantly innovating.
Too often, a business will fall in love with their product or service and neglect the need for innovation. This is the driving factor behind why businesses fail despite their best efforts in almost every other area. A lack of innovation can pose very real problems, as the economy, technology, culture and competition are constantly evolving. It’s a different world we live in today, where the only constant is change. And if you aren’t staying ahead, you’re falling behind.
Consider the technology industry today. Do you know what the life cycle is on an average product today in the technology business? About six months. And in some sectors, like the app business, it’s just a month. People expect continual innovation and improvement, and if you don’t deliver that to them, someone else will.
So, to circumvent business failure, rather than falling in love with your product, fall in love with your client and figure out every single way you can meet their needs. Anticipate what they want, what they need and, when possible, try to determine what they might not even know they need yet. Turn your customer into a raving fan – somebody who will tell everybody about your product or service or company. Because when you create that sort of impact, you’ll start to build a brand.
Overcoming your fear of business failure
Running a failing business is one of the biggest, if not the biggest, fears of any business owner. If it weren’t for that fear, we wouldn’t even be asking, “Why do businesses fail?” or any other business failure questions. However, as you develop your entrepreneurial and managerial skills, you will find that one of your greatest assets in running a successful business is overcoming your fear of business failure. Without minimizing the validity of your fears, you need to learn to view business failure as merely a step in your path to success instead of a barrier to success.
One of Tony Robbins’ central philosophies is that our mindsets create our realities; what we believe influences what we are able to achieve. As entrepreneurs, when we embrace strategies for turning business failure into success, we transform our mindset from one of defeat into one of empowerment. And when we are empowered, a failing business is not the concluding chapter in our story; it is only the beginning. Don’t give up on the hunt because you are afraid. Instead, stay hungry in your search for success. Your hunger will inspire you and pay off in the end.
Your mindset determines your capacity for success
Marketing guru Jay Abraham understands the question of why businesses fail. It’s a high-velocity and high-leverage mindset that prepares business owners to navigate the ever-changing seas of business. Rather than adapt your dreams to the economy, you must set and achieve your own goals, independent of circumstances. How can you accomplish this? By recognizing that business success hinges on loyalty to a vision.
By adhering to your passions, you’re able to see your circumstances clearly – the positives and negatives. A passion-driven mindset lets you persist in honing your ethics and beliefs while learning from all the reasons why businesses fail. With this level of focus, you create an unstoppable drive to accomplish your goals. This focus allows you to take risks, acknowledging that feelings of doom and failure arise not from circumstances but from feeling stuck in the status quo. Don’t get stuck – persist.
Why do businesses fail? Use marketing to minimize your risks
Whether your company is large or small, marketing is the next critical step. Why do businesses fail in their operations? If you cannot find a way to market your product or service, then your business will have a hard time getting off the ground. Because the truth is, you could have the most innovative product or service, but the best product doesn’t always win. Do you think McDonald’s has the best burger? Probably not. But their marketing strategies are top-notch.
To market effectively and prevent business failure, you have to understand what your “X-factor” is. You have to know what your added value is. What is it that you are here to deliver and how can you improve your customers’ lives?
Take, for example, FedEx founder Fred Smith. Among other tips for running a successful business, like hiring the right people and keeping a sense of humor, Smith emphasizes the role of effective marketing in keeping a business not only afloat but also profitable. Even in FedEx’s early stages, when profits were slim, Smith invested in three market studies for testing the value expedited shipping would add to his product. Smith’s research paid off: FedEx is now a household name, in large part due to its corner on the market via expedited shipping.
To prevent business failure, you need to keep your competitive advantage alive through effective marketing. Why do businesses fail? To help discover what your true value is as a business, go one step further and ask yourself core questions like: What does the marketplace need? Who is my customer? What can I do to make my company talkably different? And perhaps one of the most important questions you can ask yourself is, “What business am I really in?”
Marketing strategies to reach your goals
How does marketing tie into the question of why businesses fail? The American Marketing Association defines marketing as creating, communicating and delivering information that relays your value-adding product to your target market. How can we use this definition to prevent common marketing mistakes? Marketing mastermind Jay Abraham employs the following marketing strategies to overcome business failure:
Test all your market ideas
Don’t implement a marketing idea without testing it first. And instead of promoting your company alone (i.e. over your product), promote both. Try to get a direct response from customers, using strategies like direct response advertising.
Differentiate your business
Why do businesses fail? They don’t defeat the competition. Get to the bottom of what distinguishes your product from the rest. It’s your branding that will attract your target market.
Understand your client’s real needs
As overwhelming as running a business can be, you must commit to addressing your clients’ real needs. Do your market research and ask for customer feedback. The better you know your client, the more relevant your brand becomes.
Invest in self-education
Business education is expensive, but you don’t necessarily need it to run a successful business. Learn from your peers and mentors, and include client education in your marketing and sales processes.
Streamline your customer’s experience
If you’re not careful, it’s easy to misjudge your operations and assume your customer is having a smooth-sailing experience. You want doing business with your company to be easy, appealing and fun. Take preventative measures and ask your customers how you can improve their experience.
It’s tempting to conceal your business’ weaknesses by keeping them from your customers. In asking why businesses fail, the problem is that hiding your problems deteriorates your relationship of trust. Be transparent with your clients and ask for their feedback.
Create a designated marketing and sales system.
Think of your marketing and sales as a living being in need of constant attention. Evaluate and refine these systems continuously and create a list of tactical strategies for reaching your target audience.
What business are you really in?
Apple is one of the most valuable companies of our time, with a market cap of $600 billion and a stock that is soaring above its competitors. But it wasn’t always that way. Business failure is rarely about one single issue. When considering why businesses fail, you must consider your overall business identity.
Apple’s founder Steve Jobs was fired from the company in 1985. Before re-hiring Jobs in 1997, the failing business operated at a loss and inched toward bankruptcy. In fact, Michael Dell was advising decision-makers to shut Apple down and give its shareholders their money back. But Apple persisted, and Steve Jobs asked himself one of the most critical questions in his lifetime: “What business are we really in?”
At first, the answer seemed simple – Apple was in the computer business. But how were they supposed to win back customers when 97% of all computers across the United States were run by Microsoft? That’s when they realized that no matter how good their product was, Microsoft was embedded and entrenched in the masses. After all, it was one of the main reasons Apple found itself in bankruptcy.
So Jobs asked, “What business do we need to be in?” And Apple decided that it needed to be in the business of connecting people to their passions – to their photographs, their music, to each other. When he did this, he avoided one of the top reasons why businesses fail: lack of flexibility.
Change your offer, change your life
Answering this question created one of the most life-altering shifts for Apple. The company transitioned into building basic, cool technology that connects people to what they love. Upon rehiring Jobs, the company arranged a partnership with Microsoft which signaled the company’s turnaround. When Apple launched the iMac just one year later, the firm returned to profitability and made its mark. Before long came the iPod and iTunes, then the iPhone. Their net sales soared. And since that point, Apple has never stopped innovating, and their marketing campaigns have helped propel the company to an entirely new realm. Had Jobs viewed his firing as the death toll of his career (and company), the firm would have never experienced its revival.
Today, is Apple really in the computer business? Only 14.7% of their business is computers, which means 85% is not – the vast majority is made up of iPods and iPhones. So how important was it for them to answer the question of why do businesses fail?
If success is about innovation and marketing, then you have to decide who your customer is, what they need, what business you are in and what business you really need to be in. Answering these questions can change your entire business, because the answers will ultimately allow you to change your offer. As we say, change your offer, change your business – and change your business, change your life.