Small business failures

ANSWER: We’ve heard a lot of people say that the inability to get funding is the thing that causes small businesses to fail. On the one hand, this may be true. If small businesses had access to an unlimited source of funds, they would never fail. These businesses might also never make a profit, but as long as they could continue to go back to the well for more funding, they could stay afloat.

We argue that failure to obtain funding is usually a symptom of a more fundamental problem, but not in and of itself the cause of business failure. The more fundamental problem is that the business owner has not adequately answered the first question that every business must answer. Why should a prospective customer buy my product or service rather than a competitor’s? By the way, if the business owner can’t answer this question, it is unlikely that perspective customers will be able to answer it, either. If they can’t, they will likely buy from competitors.

There are only two possible answers to this question. The first is that your product or service is similar (or better yet, identical) to competitive offerings, but it costs less. Walmart is a great example of a business that utilizes this approach. It sells brand-name products, so they are identical to those offered by competitors. However, Walmart has low overhead, which it spreads over a large volume. Further, it uses its massive purchasing power to negotiate low prices from its suppliers. This enables Walmart to sell to the public at low prices — sometimes below the price competitors pay suppliers for the product.

Unfortunately, this model is nearly impossible for a small business to emulate. After all, if a business had Walmart’s volume, it wouldn’t be small. Although there are other low-cost models, as a practical matter, pursuing a low-cost strategy is likely to be difficult for most small businesses. This leaves the only other possible answer to the question: Differentiate your product or service from the competition.

Identify the set of attributes that makes your product or service uniquely attractive to at least some segment of the market. Differentiation is good, but being different alone is not sufficient. We often use the silly example of a skunk-flavored Popsicle. That would be different. There is nothing remotely like it on any grocery store shelf. Unfortunately, it isn’t likely that many people would want to purchase this clearly differentiated product.

The difference has to be something that will influence some segment of the market to buy your product or service rather than the offerings of a competitor. Once you have identified the attributes that differentiate your offering, make sure that the segment that values this difference is large enough to support your business and the growth that you plan.

Finally, you will have to reach the segment of the market that values what differentiates your offering with your marketing message. There is an adage that says, “If you build a better mouse trap, the world will beat a path to your door.” The adage is wrong. If the world doesn’t know that you have a better mouse trap, no one will be knocking on your door. You must make the people who will value the thing that differentiates your product or service aware of what you have to offer and why it uniquely meets their needs.

To be sure, many things can cause a small business to derail, but in our experience, the most frequent reason is that the owner has failed to effectively differentiate his or her product or service from the competition. Make sure that you know why a perspective customer should purchase your product or service rather than a competitor’s.