If you are a small business owner in the United States, you are in good company.
According to the US Census Bureau, around 1.4 million new startups were filed between June and September 2020, but research from Lending Tree reveals that around 20% of those will fail during their first year.
There are many reasons new businesses fail, from misreading the market, to hiring the wrong people, and facing legal challenges.
Based on this, here are the main reasons a small business will fail in its first year, along with expert tips on how to avoid this.
Not Knowing Your Product or Service
Starting up a new business is a big commitment and shouldn’t be something you do for the sake of it. To succeed, you must have a passion and knowledge for your business venture and firmly believe that your product or service would fulfill a real need in the marketplace.
Planning and research are crucial for ensuring your business idea is feasible; therefore, you must spend a significant amount of time researching your business idea to know it inside and out. Research reports can sometimes be prohibitively expensive for start-ups, therefore choose university papers and blog posts to help you instead.
Establishing pricing is also essential in the research stage, as you want to ensure it will receive an adequate return on investment. Analyzing your competitors is crucial here as you want to see which products and services are doing well in your sector, and this will help you decide where your pricing will lie.
Conducting market research is so important. Listening to feedback from customers and business associates you trust can have a huge impact on your decisions. Do not pursue any further until you are 100% confident in your business.
A popular way to find out customer demand is through market research surveys. It is good to conduct both primary and secondary market research as this will allow you to determine your target audiences. SurveyMonkey Audience is a quick research tool you can use to conduct your survey, particularly in times of social distance.
Failing to Have a Robust Business Strategy
The saying “failing to prepare is preparing to fail” is extremely relevant here, and every small business startup needs a growth strategy. A strategy is a concrete guide you should refer to a year, two years, or even ten years down the line.
Once you have conducted thorough research, establishing some of the key elements your business will entail is extremely important. Mapping out these assets will help guide your strategy and focus through the duration of your first year.
The first thing you should establish is a unique value proposition. This is a clear statement that describes the benefit of your product or service and how it will solve your customer’s needs, as well as how it distinguishes you from the competition. Your unique value proposition should appear prominently on your landing page and in every marketing campaign.
Next, you must have a clearly defined target market. This is extremely important because it enables you to direct your product or services to those customers who will have the highest interest in the product. Targeting a specific audience will encourage interest and loyalty to the brand, increasing the potential for sales growth. Not only this, but having a loyal audience will help promote your brand’s reputation.
Key Performance Indicators (KPIs) are key metrics that you want to fall in line with your business goals. To do so, you need to make sure your business goals are measurable and actionable with a reasonable time frame. For online businesses, you can measure metrics such as:
- Conversion rates, comparing the total number of sales to website traffic
- Shopping cart abandonment rate, which shows how often users leave without completing their purchase
- Measurement of how much a customer spends when shopping on your site.
If you are looking to have several employees, you want to ensure you have a smart recruitment strategy. Whilst looking for precisely the person your business needs, it is important to use the right software to make that process easier. There is a lot of time and money to spend on hiring, which is why many companies now use applicant tracking systems (ATS) to streamline the hiring process. Apps like Workable, BreezyHR, and Zoho Recruit are among the HR platforms that place applicant tracking within small businesses’ reach.
Careful money management and keeping a lid on costs are vital when running a small business, especially in the current climate. Start by creating a financial plan for the next 12 months to make sure you don’t run out of money. A simple Excel spreadsheet or Google Sheet which says “money in, money out’ will work.
Try to keep your spending to one bank card. This means you can rely on your bank statements to include every tax-deductible expense you have incurred.
Not Budgeting for Marketing
Audiences won’t find out about a business themselves. It’s you that has to increase awareness, and marketing channels are a great way to do so. It is always useful to read stories of other successful entrepreneurs when they started up and consider if this will work for you.
In the U.S., the e-commerce sector grew by 44% last year, showing that more business is occurring online and, believe it or not, almost half of all small businesses in the U.S. don’t have a website.
Google has become the first point of call for pretty much every purchase today and this isn’t just for big brands. Local search is also a huge opportunity for small businesses.
The cheapest and most effective way of marketing is through search engine optimization (SEO), pushing your business further up Google’s search engine. Keyword search is a great way to do this; as you learn which terms and phrases your potential customers type into search engines, you can use these on your business’s site for optimization.
Networking is also widely recommended for marketing small businesses and startups. Through personally interacting with your audiences via social media, emails, and sometimes phone calls, you can build trust with fellow professionals and audiences. To successfully network, platforms such as LinkedIn, Facebook, Instagram, and Twitter are crucial for a small business to increase brand awareness. A company with a substantial network online will help to prevent business failure.
Businesses can also take advantage of paid marketing. For example, Pay-per-click (PPC) advertisements, if managed correctly, can provide a higher return on investment when compared with other forms of marketing.
There are several mistakes small businesses can make with marketing, such as not having a proper plan, targeting the wrong audiences, and being unaware of what their competitors are doing.
Not Having a Plan B
As a business owner, you shouldn’t be afraid of taking risks, and they will always be in the picture along the way. However, you must manage these risks and mitigate any unforeseen event that could harm the company’s resources and expenditures.
As an entrepreneur starting a new business, you are already taking financial risks with loans and investments on top of hiring employees, marketing strategies and, of course, your reputations. This is why having a risk management plan is important to help you develop a detailed strategy to deal with certain risks, whether it be hiring the wrong employee or making a financial mistake.
Your risk management strategy must incorporate factors like time and resources, following these four steps below:
- Identify potential risks that are related to your business. To prepare for this, find an accounting firm nearby that specializes in risk management.
- You then need to assess these different risks and conclude the likelihood of occurrence and the level of impact they will have on your business.
- Managing risks is crucial. Depending on the risk, you need a cost-effective risk response strategy. You must decide whether mitigating the problem, accepting the problem, or escalating it will be the least damaging option.
- Looking back on this, you must monitor what has happened and review the situation. Analyze what you did well and what you could have done differently. This will help you go forward with encountering any other hurdles.
Finding the right insurance for your company is also important when you’re starting out. Insurance is a common mistake, and a hefty payout can cripple so many businesses before it’s even had a chance to get past its first year. It is important to take out the right insurance policy to protect yourself against unforeseen issues that may appear in the future.
JC Glancy is a co-founder of ZenBusiness.