Q. I’m contemplating starting a business. I understand that most startups fail. Can you tell me why startups typically fail and how I can avoid the pitfalls?
A. The short answer is that most new businesses fail because they don’t generate sufficient revenue to sustain themselves. Admittedly, there are other reasons that startups don’t make it, but in our experience, this is the most frequent culprit. To ensure that your business generates enough revenue to succeed, we recommend following these four steps:
1. Differentiate your product or service – In his book Competitive Advantage, Michael Porter, a professor at Harvard Business School, said there are only two ways to successfully compete, either your offering must be differentiated from other options or it must be priced below the competition. As a practical matter, startups rarely have the volume necessary to support a low price strategy. Therefore, they must differentiate their offering. Startups must give prospective customers a reason to purchase their product or service rather than those offered by competitors. If you can’t articulate clearly and concisely why someone should buy your offering, our advice is not to launch a business. In our experience, failure to do this is most frequently the reason that startups struggle to generate sufficient revenue.
2. Identify your target market segment – Okay, so you know what makes your offering different from others in the market. Unfortunately, that by itself, is insufficient if too few people value the thing that differentiates your product or service. Our silly example is the skunk flavored Popsicle. If you marketed this product, it would be differentiated—nothing else like it on the market. Unfortunately, sales would likely be very low. Few people would be willing to purchase this differentiated product. You must identify a segment of the market that values the things that differentiates your offering and it must be large enough to support your business.
3. Decide how to reach your target market segment – Whoever said, “If you build a better mousetrap, the world will beat a path to your door,” was simply wrong. If the world doesn’t know you have a better mousetrap, no one will be knocking on your door. You have got to have a cost effective plan for reaching your target market segment with your marketing message. You need to communicate why your offering is the right choice for them.
4. Know how close the sale – Too many people launch a business because they are great widget builders. They forget that they will have to sell the widgets. Understanding what differentiates your offering is paramount. Identifying your target market segment is critical. Reaching your target market segment with your marketing message is a necessity. Yet, even after you have done these three things, in many cases, you’ve still got to close the sale. Be sure you know how you will sell your product or service before launching your business.
Starting a business is risky and the odds are stacked against you. Most new ventures close the doors because they fail to generate sufficient revenue. Maximize your chance for success by following each of the tips above. As you think through each of them, be brutally honest with yourself. In this case, self-deceit can be deadly. Coming up short on any one of the above action steps can spell disaster for your fledgling enterprise.