According to the data from the U.S. Bureau of Labor Statistics (BLS) reported by LendingTree, 18.4% of businesses in the U.S. fail within the first year. Within 5 years, more than 49.7% of businesses have failed and more than 65.5% of businesses fail within 10 years. These statistics are a great indication that if you start a business, you are more likely to fail than succeed. Learn why most businesses especially small businesses and start-ups fail and how you can protect your business.
Whether you are a small business or a big business owner, you need to start thinking about failing as much as you think about succeeding. Just like the two sides of a coin, success, and failure are always intertwined. Where there is success, failure is just around the corner.
The question is what causes businesses to fail? In this article, I will show you exactly why businesses fail and what you can do differently to stay in business for as long as possible.
To protect your business from failing, you need to know why businesses fail. It is extremely important to understand what most business owners are doing wrong and take a different path. Only then, you will build complex systems and design policies that protect your business and keep you in the market longer than your competitors.
Why do most businesses fail?
Although there are a lot of things that cause businesses to fail, most of them can be narrowed to the 13 reasons I will cover in this post. Many businesses take similar paths. If one business is not running out of money, it is struggling to retain talented employees. Businesses that are not struggling with business planning, retaining customers, or creating competitive products, are staying behind due to their inability to cope with changes.
Startups and small businesses usually have higher failure rates compared to large businesses. This is because small businesses and startups are not fully established, have not acquired the right customers, and most of the time, lack the necessary financial support for marketing, product development, management, etc.
The following are the top 13 reasons why businesses fail. Without further ado, let’s get started.
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1. Not understanding the target market
Although there are over 9 billion people in the world, no business can target all these people. You cannot market to everyone in the world. Successful businesses usually develop a product based on their target markets. For example, luxury car makers such as Volkswagen have different models that are marketed to different customers. Although this car manufacturer makes Bugatti and Lamborghini models, you will not see these cars marketed the same way as the general public and cheaper car models the company makes. That is each car model is designed and marketed based on its specific target market. In this case, luxury car models from the same company are marketed only to upper-class people instead of the lower and middle classes.
Businesses that fail are those that try to target everyone. By targeting everyone, you end up competing with every business in your market and expose yourself to business exploitation. Furthermore, you end up exposing your business to long-term financial struggles due to heavy marketing expenses. If you want to ensure the success of your business, pick a target customer and design a product that solves your customer’s problems. The more value you provide to your customers and the more competitive you become, the higher the chances you will succeed.
2. Not having a great value product
A wise man once said, ” Your customer comes first.” What this means is that you need to design a product that customers want. Some businesses fail because they stick to old designs that no longer offer value to their customers. You can’t succeed as a business if you cannot solve your customer’s problems.
Whether you have a start-up, small business, or large corporation, you need to continuously make great value products. Businesses fail not because they don’t have employees or don’t release new products. Instead, most businesses make below-average products that sometimes do not offer value to their customers. It is like some businesses make products with little to no use. Customers cannot continue buying your products if those products are not helping them solve their problems.
You will start losing customers and sales the moment your customers realize that your products are no longer solving their problems. If there is a competitor who offers more value, they switch to that competitor. Make sure that you stay ahead of your competition and study your targeted customers. No matter how cool your product is, it will be useless if it cannot offer value to your customers.
3. Businesses fail due to competition
If you are a business owner and afraid of competition, you will not stay in business longer. Businesses are created every day and others close their doors. The competition encourages creativity which leads to designing the best products possible. Also, competition leads to lower prices which benefits the end users or customers.
Although competition is good for the customer, many businesses fail due to competition. For every business that succeeds hundreds of other businesses close their doors. For example, before Walmart became a big thing, SEARS was a major retail company in the USA. But, intense competition from Walmart and other major retailers such as Target, Best Buy, Macy’s, J.C. Penney, and Nordstrom, marked the end of SEARS as you knew it.
So, what went wrong with SEARS? This former retail company experienced intense competition from the retail companies I listed above. Due to the lack of innovation and competitive advantages, SEARS could not stay in business any longer. So, SEARS failed.
You probably used or heard of Skype so many times. After the rise of video-conferencing software and companies such as Zoom, Google Meets, Messenger, and Microsoft Teams, nobody talks about Skype. It is like Skype ceased to exist. Skype has not failed yet. But, it is no longer a top video-conferencing app and it will never be one.
The point here is that no matter how big or small your business is, it will one day fail. The way businesses are conducted changes daily and only those that can cope with change and competition will stay in business. Your business will fail if you are not willing to compete until the last minute.
Related: 8 reasons why competition is good for business
4. Lack of adaptation to changes and new technology
Speaking of changes, no business can survive long enough without adaptation to change. The internet has made it easy, faster, and convenient to buy any product from anywhere in the world. Due to the internet, new businesses were created to meet this demand.
As new online businesses popped up everywhere, existing businesses with physical infrastructures found themselves in deep water. Yes, they were dominating giants but had little to no presence online. The only way they could survive was to keep their physical infrastructure and build an online presence.
Besides the internet, new technology inventions are forcing businesses to change their models to cope with competition and increase their sales.
For example, before AMAZON became a big thing, physical retail stores were a major thing. After AMAZON built its name, thousands of small businesses failed. Why did many businesses fail? Because people started shopping on AMAZON and stopped going to those stores. Without customers, sales of thousands of businesses plummeted which led them to bankruptcy. The only retail businesses that survived were those that responded quickly and increased their online presence.
Other examples of businesses that failed due to the lack of adaptation to change
Another good example of a business that failed because it could not cope with change is Blackberry. Before Apple and Samsung took over the telecommunication industry, Blackberry was a major player in this industry. Due to innovation from these two major players in the industry, Blackberry could not keep up. This company has not failed yet, but it is heading there. There are other companies in the same boat such as:
- Blockbuster failed due to changes in the industry, competition from NetFlix, and Redbox, and too much debt.
- Kodak failed because it did not invest in new technology and wasted funds buying small companies that could have been used to develop digital cameras and increase sales.
- MySpace failed due to competition from LinkedIn, Meta, DailyBooth, Multiply, and Randstad RiseSmart. Legal battles and poor product designs also contributed to its failure.
Thousands of other companies failed because they could not adapt to changes. A change in a particular industry brings new competitors. So, all existing businesses fail except the ones that adapt to change and reposition themselves in advantageous positions.
Change is inevitable and only businesses that can cope with change will stay in business
By now, everyone is well aware of the rise of Electric Vehicles(EVs) in the automotive industry. Tesla has become a major player and existing businesses are transitioning from only gas cars to hybrid cars and all EVs. Almost every large car manufacturer is now releasing EV cars. This is an adaptation to changes. Businesses that cannot incorporate EV technologies in their designs will soon go bankrupt.
It is not only gas car manufacturers that will be wiped out. Once EV cars take over, most gas stations will start building charging stations in their locations to attract people. Gas stations make most of their money from selling groceries. But, they cannot have customers without selling gas. Those that will not have charging stations, will experience a steep decline in customers and fewer sales. Eventually, they will go bankrupt. This does not only apply to gas stations. Oil refineries, third parties such as oil trucking companies, etc., will all follow the same fate.
5. Targeting a single customer
Diversification is very important in every sector. Many people think that diversification only works in investing. The hard reality is that successful businesses are the ones that are fully diversified in their markets.
What do you think could have happened if Apple was selling only iPhone? There would not be Apple as we know it. Although Apple makes most of its sales from selling iPhones, it also generates substantial sales from selling computers, tablets, TVs, wearables, accessories, etc. Apple gets to dominate in selling phones and steals customers from its competitors by selling other products. This increases Apple’s revenues and makes it a major competitor in the industry.
If Apple happens to lose half of its iPhone customers, it would still make some sales. Diversification reduces your chances of failing as a business.
Many businesses fail not because they don’t make great products. Instead, they only sell one or two products. This rookie mistake takes them out of business when a major competitor starts making the same products. The competition will take away some of your customers which will plummet your sales and make it harder to meet your business’s financial obligations.
If you are selling one product, any customer that you lose means you are one step away from failing. To prevent your business from falling, you need to make a great number of products. Even if you lose an entire market from one product due to competition, you will still make sales from other products. That is how you stay in business.
6. Ineffective leadership team
The leadership team for any business is like the captain of a ship. People at the top and in management positions are the brains of the company. Having inadequate and less competitive leaders means that any decision that will be made will also be less competitive. Most businesses that fail usually have less capable leaders. Leaders who do not work hard for the benefit of the company cause irreversible catastrophic outcomes for their business.
7. Lack of financial resources
Start-ups and small businesses are two types of businesses that struggle with financial resources the most. Startups are not fully established, have not conquered the market, and do not have enough sales to cover ongoing expenses. That is why they need a ton of money for marketing campaigns, product development, and administrative expenses. Unfortunately, many investors fear start-ups due to the lack of credibility and proof of success. So, start-ups fail to raise capital when they need it the most.
Small businesses also fall into the same category. These businesses do not make enough sales to cover all their expenses. Most of them break even. Any small mistake or unforeseen expense puts small businesses in long-lasting financial trouble.
The lack of financial resources is a major cause of business failures. Start-ups cannot stay in business without enough cash to keep them going before they generate enough cash flows. Small businesses also find it difficult to meet their current financial obligations and invest in product development. So, they stay small or fail before they open a second branch. If your business doesn’t have the needed financial resources, you will find it difficult to stay in business for long.
8. Lack of business planning
Successful businesses rely on understanding their target markets, designing great products, analysis of competitors, and many other factors. Even if your business is bringing in enough sales, you will still need business planning to stay ahead. You cannot predict the future but you can plan for it.
You need to understand how the market is changing, who is your competitor, your projected cash flow, new designs, product development, etc. All these evaluations will help you establish strong policies and make changes necessary to adapt to changes. For example, you can allocate a small portion of your profit toward marketing infrastructure or new product development. You might end up phasing out a particular product to pursue another one. These changes are not possible unless you have the needed capital or can raise it from investors.
Most businesses fail because they suck at business planning. The moment they see cash coming in, they lay down their guards. The truth is that running a business is a never-ending battle between you and your competitors. That is why it is important to keep what is working and continue looking for other ways of strengthening your businesses.
9. Ineffective marketing strategy
In the current digital world, marketing has become a major factor in business success and development. With the right marketing strategies, your business can reach the right customers and bring in more sales. More sales mean more revenues and eventually profitability.
A big mistake many businesses make is to ignore marketing. They only focus on developing products, and later, they realize that they need customers. No matter how good your products are, you cannot make sales without customers. Your business cannot survive if it cannot generate enough revenues to cover at least your production and administrative expenses and other financial obligations. The lack of competitive marketing strategies leads to fewer revenues and eventually bankruptcy.
Social media used to be a big joke. Now, many businesses are evolving around social media. Why? Because you can easily reach millions of people from anywhere in the world at a low cost. Having a website alone is not enough. Again, the more people you can reach, the higher the chances you can sell a product. As a business owner, you should look into all marketing strategies and tools available at your disposal to boost your sales.
10. Lack of a vision
Many people start businesses but never have visions for them. What do you want your business to look like in the next five, ten, or more years? Will you create new branches or stay small in one location?
Are you planning to stick to the same products or look for other products? How are you going to stay ahead? What kind of technologies you will incorporate in your business to be more efficient and increase qualify? What will your leadership team look like? All these questions and many more are important in establishing the vision of your business.
Many business owners never have visions for their businesses. They survive one day at a time. A business without a vision is like a person walking on the edge of a cliff blindfolded hoping to not fall into the ravine. A business that follows the same strategy is doomed to fail.
11. Lack of innovation causes businesses to fail
The lack of innovation is probably at the top of the list of reasons why businesses fail. Due to new technological advancements, highly innovative products are being made every single day. For example, if you compare the first iPhone and the models we have today, you will see a great difference. That means Apple had to continuously innovate its designs to stay in business.
Companies that did come up with great products through innovation such as Nokia, BlackBerry, and Motorola will soon close their doors or be acquired by giants in the telecommunication industry. That is how it works.
12. Lack of transparency
Did you know that businesses fail because of the lack of transparency? The moment your customers realize that your products do not do what you said they do, you will lose them. People buy products because there is a problem they want to solve. It is your responsibility as a business owner to give them products that solve those specific problems.
You cannot build a business on a lie because the truth eventually comes out. Lying to your customers leads to lawsuits and long-term financial troubles. Investors start walking away, customers go to your competitors, and eventually, your business fails.
Have you heard of a company called Theranos? If you never heard of it, it is because it went bankrupt a few years back. The founder (Elizabeth Holmes) claimed to have made a breakthrough in healthcare technology. She raised millions of dollars from investors and venture capitalists. Later, they started learning that she lied about her invention and that her business did not do what she claimed to do. What happened next was a bankruptcy and a legal battle. She lost the business and now she is struggling to clear her name.
There are thousands of businesses that fail the same way due to the lack of transparency. You cannot lie forever. Your business will fail, the moment the truth comes out.
13. Businesses fail due to Cutting corners
Another major reason why businesses fail is due to cutting corners. Due to competition, some business owners rush their products to the market without fully examining the quality and functionality of their designs. The moment they reach the market, they realize that their products are not as competitive as they thought.
Some of these products end up causing a lot of hazards and health risks due to some steps that were skipped. You probably heard about many car manufacturers that recalled millions of their cars due to random fires during collisions. These recalls cost them millions of dollars that could have been used to strengthen their businesses. Once something like this continues, businesses run out of money and later go bankrupt.
The best way to build a stronger business is to design a product that is hard to beat and build strong marketing and sales teams around it. Never release a faulty product to the market, and more importantly, never lie to your customers or the government. That is bad for business.
