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Why small businesses fail

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According to the SBA 25% of small businesses fail in the first year, 50% in the next one and 66% in the first 5 years.

Gloomy figures and ones we don’t want to think about when we are a small business.

Starting and running your own business is hard work. There are a lot of unknowns and many strings you have to pull at the same time. And when you are made to realise just how little chance you have to succeed, with numbers like the above, it’s not the best push forward you need.

However, the good news is that most of the time, the reasons for a small business not taking off are consistent and that is what your focus should be on - how do I make sure I don’t fall down because of the same things that make 6 out of 10 companies close shop in the first 5 years.

So what should you do?

First and foremost - stop calling yourself a small business. You are a business. Full stop.

The fact that you have an idea and a working idea of a plan to make it happen is more than most people. All businesses started small. What they become is besides the point- it takes just as much grit and determination and planning to run and grow a small business as to maintain and scale a big one.

“it’s just as hard to win a small fight as it is to win a big one”

By limiting yourself to the mindset of running what will forever be a small business, without the vision of what it could become, you’re always going to be fighting the small fight - and fighting just as hard.

The reason I stress this is because with that shift in mindset comes the difference - what makes companies thrive and what makes them break. When you think of yourself as a business (not small or big) it is easier to think about what needs to happen to move the wheels forward on a sustainable basis.

There are specific levers to pull across three looping stages to be part of the four out of ten that cracked it as opposed to the six that didn’t.

  1. Stage 1 - Plan
  2. Stage 2 - Implement
  3. Stage 3 - Evaluate
improvement cycle

In this article I'll be covering Stage 1 - with Stage 2 and 3 following every week. 

There are many frameworks out there that you can use for these stages. I personally love Strategyzer as it is easy to follow and modify to your needs, but just google "value proposition frameworks" and you can't avoid tripping over them. 

Stage 1 - Planning

I cannot stress how important it is that you spend time here for so many reasons. Without a solid plan for your business, your idea is just that- an idea, not a business.

Without understanding why, what and how you want to achieve with your business, chances are that one of the below will happen -

  1. You build it and no one comes
  2. You can’t sell more than a few products/services
  3. You get a lot of demand but can’t fulfill it without making a loss
  4. You get overtaken by competition (and this is where there is a difference between a small and large business - large organisations with scale and resources on their side see more barriers to entry than smaller companies whose plans can be replicated more easily by me too start ups)

Within this stage you’ve got to consider : 

(A). Your Value Proposition : WHY

  1. Target audience - Define them as narrowly as you can. You are always solving for somebody rather than everybody. Find out who that somebody is that will ideally buy your product. Create a persona/write down their demographic/behavioural/attitudinal characteristics. 
  2. Why they should care about what you will sell? 
  3. What are the competing or alternative or substitute solutions they consume right now - 
    1. Who are your main competitors and what do they offer? 
    2. Where are they strong and where are they weak
    3. What needs don't they meet at all/not meet well
  4. What is their ecosystem (the journey map towards and of your product)

Oh and by the way, once you've got this all thought out, go out there and speak to people - find real people who you want should buy your product and find out what their motivations, pains, needs, delight factors are. You don't need an answer to their problems just yet - you need to know for sure you're trying to solve the right set of problems. 

Outputs: Strategyzer Value proposition Canvas (for your main persona/buyer type), their journey map (tasks they need to accomplish), competitor market research 

(B). Value Proposition: WHAT

  1. From the above define in a single statement what your product is and what value it brings compared to what’s out there. My favourite template is below (strategzyer again! Keeping it simple) - it looks easy but is quite difficult to narrow down - the trick is to be as condensed and specific as possible - a well defined set of words for customer segment, no more than 2 per jobs (who want to...), pains relievers of your product (by...) and gain creators (and...)
    1. Once you get this right, keep it evolving... this is then your elevator pitch and the answer to "what does your business do?"
    2. While you may be providing a complex, multi-layered product or service, the end point is that if you can't explain it in an easy short way, you've lost your audience. This statement helps with that and forces you to focus
  2. Your offering  - what are your core features, what are the USPs and what are hygiene factors 
    1. The best way to do this is to visualize it with something called Kano's model - 

      The Kano model is a theory for product development and customer satisfaction developed in the 1980s by Professor Noriaki Kano, which classifies customer preferences into five categories.

Basically, it's a great way to understand if that cool functionality/feature/service element you're offering is a basic expected feature which you can't market because it's not what drives behaviour, but if it doesn't exist, will be a disaster - kind of like airline safety or restaurant hygiene...

Here's how you do it - you break up your product/service into modular features and map each piece against a graph of how well customer expectation is realised (horizontal axis) vs. How satisfied a customer will be if you increasingly meet their needs (vertical axis). 

Your product/service offering and its features can each be divided up into 5 categories 

  • Threshold (Hygiene Factors/Must-Haves) - These features are taken for granted buy customers when they exist but cause significant concerns when they don't exist. Basic features that people will complain about if you don't have them or not purchase from you, but will make little difference when marketing them. It's the reason they don't buy but not the reason they do- again, airline safety, home button on a TV remote, custom ring tones on a phone...
  • Performance  (One-dimensional). These features see a 1:1 relationship with delivery - the better you deliver these features, the happier customers are and vice-versa. Most companies compete in this space and actively promote differentiation in these features. Think phone battery life, speed of delivery, speed of search results on a website...
  • Delight (Attractive). If they exist, they cause a lot of satisfaction but no dissatisfaction if they don't as customers don't normally expect these. These features meet unspoken/latent needs of customers and are the true differentiators you should build up over time if you want to create customer stickiness. Examples include freebies such as 10th cup free in a coffee shop, free filters with oil checks... or proactive call backs... the service element of a product becomes especially significant here. 
  • Indifference (don’t cares):  These features have no positive or negative effect I. Customer satisfaction and no impact on purchasing behaviour, good or bad. Just because you’ve created a handmade item isn’t going to matter if it doesn’t pass muster in quality. 
  • Reversers (avoid):  these features cause dissatisfaction if they exist but no extra satisfaction if they don’t. Make sure you avoid these at all costs in your offer. Examples include too many features on a phone overwhelming a customer, too many clicks to ge to where you went in a website...

Outputs: , Value Proposition Statement, populated Kano Map (which ideally you should keep adding to and moving around on an ongoing basis), Value proposition canvas with both sides filled in 

(C). Your Value proposition - HOW

  1. How will you monetise your product or service - don’t worry about the actual price yet - rather figure out the pricing strategy and income streams - immediate and future.  
    1. What will be your potential sources of revenue?
    2. What will your pricing model be (transactional/bundled/freemium...?)
    3. What will your initial and longer term pricing strategy be (low price penetration/high end premium?)
  2. Your costs to build, operate/serve and maintain/scale
  3. Go to market - How will this product be delivered to the consumer ?what channels of delivery will they use to consume it/ how will they even find out about it? how will they complain about it ? How will they cancel it?
  4.  What are the dependencies, relationships and barriers to entry and exit for you

#2 and #3 influence #1 and vice-versa - for example, you don't want to get stuck in playing in quadrant B, creating losses as you scale.

OUTPUTS: the Lean Canvas 

At the end of the day...especially as a smaller business with less dead-weight you can carry...if you are not executing against a specific plan...the chances of going adrift are higher for a smaller ship than a bigger one.

Shoutouts: Here's a video on Youtube explaining how the Value Proposition Canvas works 

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