August 8, 2014 9.54 am This story is over 115 months old

Why do new businesses fail?

Continuing success: Michael Gibbs explains why new businesses fail, and how to avoid this happening to your startup.

In a number of cases, many new businesses fail shortly after conception. But why is this? Well, I think it can be put down to three pointers, all relating to research:

1. You have not understood who your customers are, and what they are prepared to pay for.
2. Not enough of them know about you fast enough.
3. You don’t have the resources to do the first two properly.

Before launching a new business, do your homework! Find out what your particular market place looks like. Think of your marketplace as a jigsaw picture, and you are trying to find little pieces of information that allow you to paint that picture. For example, who are you going to compete with, what are they good at, what they not so good at, what level of prices do they offer, what do customers think of them?

As you paint the picture of your marketplace you will gain a better understanding of how you are going to compete. Remember, before you start 100% of your customers are currently in the hands of a competitor or they don’t use your product or service at all. Your job is to work out how you can attract them to your business.

It can take two to three years to build a sustainable customer base, so make sure your marketing is as effective and thorough as you can afford. Use all the tools available through social media and target your material at your market. Your homework will have helped you describe your ideal customer; if you can describe them then you can work out where to put your marketing material to best effect.

There are many opportunities to acquire marketing skills, many of them provided free of charge, and will help you understand where your resources are best used and how to spread the word about the benefits of doing business with you, rather than one of your competitors.

A basic cash flow forecast will help you identify where your business is going to need support, either from your own pocket or from another source of finance. Forecasting is seen by many as educated guess work, but with some effort you will find evidence to support the numbers you calculate. This is hard work, there is no short cut, you need to talk to potential clients and find out what it is that will make them buy from you.

Ideally you want orders in the book to justify starting, but in the absence of real orders you need a significant number of clients to tell you that if you supply that product at that price they will buy it. If you haven’t got that evidence you will need to be very lucky to survive at best, and at worst your bank balance will look pretty poor!

Understand your customers, find out how to talk to them, learn what they want to buy, supply it in a timely and cost effective form, and repeat again and again and again. Make sure you have sufficient resources to do the job properly. If you don’t know how to do some of these things, seek help and advice, there is plenty available.

Avatar photo

Following a career at Director level in the UK, Germany, Spain and USA, Michael set up and ran two companies in the UK and in recent years has assisted over 800 companies in starting and building their business. Mike is currently working with NBV Enterprise Solutions in Lincoln and West Lindsey in the role of Business Adviser and Mentor.