There have been many articles written on the subject of why
businesses fail, and most of them point to the same reasons, such as:
-Inadequate funding
-Bad location
-Lack of a well thought-out business plan
-Poor execution
-Bad management
-Expanding too quickly
-Insufficient marketing or promotion
-Inability to adapt to a changing marketplace
-Failure to keep overhead costs low
-Underestimating competitors
These reasons are widespread and no doubt cause many
businesses to fail. However, the reason
for a company’s failure is not always something so obvious. Here are 6 lesser-known reasons why a
business might fail.
Why do these reasons remain untold? Simple.
Most of the time, the business owner doesn’t realize that these reasons
are what caused their failure, and consultants generally don’t ask the kinds of
questions that would identify them.
1) Focusing on
Short-Term Profits Rather than Building Long-Term Value
It’s important to be profitable, but NOT when short-term
profits come at the expense of the long-term value of the business and the
lifetime value of the customer.
Here’s a real-life example:
In the late 1990s, there was a franchise of a national smoothie shop located
in
As you can see here, it’s important to consider the lifetime
value of a customer. Repeat business is way
more valuable than short-term profits. Saving
20 cents on a smoothie today will cost you big in the long run.
(Another great example of this concept is Google giving
preference to relevant ads in order to improve the user experience, even though
there are less relevant advertisers willing to pay a higher price [1] per click.)
2) Ego Business vs. Business
The foundation of a good business is a good business
opportunity. As an entrepreneur, you want
to fill a need in the marketplace.
Unfortunately, many businesses are started solely to fulfill an
entrepreneur’s ego (or, to put it less harshly, to satisfy one of the
entrepreneur’s interests).
This can often be seen in the restaurant & bar industry,
where too many entrepreneurs open shop because it’s a “cool” thing to do. Such businesses rarely succeed.
3) Life distractions
The best ideas don’t always come between 9 and 5. A person might have a great idea while
driving, or in the shower, or while working out. It’s moments like these when an entrepreneur
leaves behind the day-to-day tasks of running a business and gains a better perspective
of the big picture.
Sadly, there are a lot of things that can disrupt a person’s
home life. Illness, death of a family
member, divorce, relationship trouble, and problems with a child are just a few
of the many issues that can affect a person’s mindset. When things like this occur, moments of
clarity are replaced by stress and anxiety.
Many entrepreneurial ventures depend heavily on new ideas
and creative thinking, and when an entrepreneur’s head isn’t clear, business
can suffer.
4) Bad feedback &
white lies
People like spending time with friends and family.
Unfortunately, when it comes to business, friends and family
members don’t always give the best advice.
This is especially true at the birth of a business. Nobody wants to be a buzz-kill. No one wants to tell an entrepreneur their
idea is bad, or their location stinks, or anything else negative. Most people are conditioned to be supportive
of their friends and family regardless of the situation.
Plus, nobody wants to be wrong. Imagine your friend has an idea that you
think is terrible. You share your
objections, but the friend goes ahead with the idea anyways, and it
succeeds. Now you’ll always be the
naysayer that never believed in them.
Nobody wants to be that person.
That’s why you’ll rarely get honest, objective business advice
from friends or family members. And yet,
oftentimes friends and family are the first people entrepreneurs turn to for
advice.
5) Maybe the owner is
just a jerk
There are a lot of great people in the business world, but
there are also some jerks. And these
jerks sometimes start their own companies.
A jerk, in this case, is someone who a lot of people can’t
get along with. Maybe it’s because they’re
a super-perfectionist, or they yell a lot, or they demand that everything be
done in a certain way, or they constantly complain. Or maybe they’re annoying in some other way.
The key is that nobody -- not employees, customers,
partners, suppliers, clients, etc. -- wants to give 100% for a jerk. Clients and customers will be turned off, and
employees will start cutting corners.
Most people believe that life is too short, and don’t want to spend
their time working with someone they can’t get along with.
6) The entrepreneur
never took the full leap
In most new business attempts, the entrepreneur never leaves
their day job, or they create a back-up plan, or they have a job lined up in
case the new business fails. In these
cases, failure IS an option, as the entrepreneur has a safety net to fall back
on. In cases where failure is NOT an
option, and the entrepreneur depends on the new business to provide food,
shelter and clothing, the business has a greater chance of succeeding.
There’s a great example of this concept in this
recent NY Times article [2]. Xiang Yu
was a third century (B.C.) General in the Chinese army. He led his troops into enemy territory by
crossing the
Xiang Yu’s methods might be a little drastic in this day and age, but the moral of the story is what’s important. Author Anita Roddick has said that entrepreneurship is a matter of survival, and the truth is, if you’re not totally committed to your business, your chances for success will be greatly diminished.
---
About Growthink
Since 1999, Growthink's professional business plan writers
have assisted more than 1,500 clients in launching and growing their businesses,
and raising more than $1 billion in growth financing.
- Want to ensure that your business succeeds?
- Need help with your business plan?
- Looking to raise venture capital?
Speak with a business plan consultant [3] today!