The 4 Pitfalls Small Businesses Face
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Startup companies face many ups and downs on the road to success. Making mistakes is part of the all-important process, offering you the opportunity to learn from them and implement new procedures so you can avoid similar pitfalls in the future.
Growing pains can make startup companies stronger. Still, it's good to be informed on things you could face along the way, so you can prepare for them.
Here are four common challenges:
1. An unstable market. One of the primary reasons startup companies fail is they rush into production without having a stable market for their product or service. Even with a solid idea, your business could crumble if you haven't researched the market.
Things to watch out for when entering the market:
- There isn't an intriguing enough value proposition to cause buyers to commit to purchasing your product or service. Ask yourself whether the product or service you're offering consumers is "nice to have" or a "must have." This will help you decide whether it's worth investing your energy in this or should move on to something entirely different.
- Even if you have a valuable product or service, the time you enter the market could be what eventually becomes a hindrance on your business. Your idea could be so great that you might be years ahead of your market, which ultimately results in consumers who aren't ready for your product or service. If you've got the funding to stick it out for a few years while the market catches up, it's worthwhile to do so.
- The market size of the people who want your product or service and have the funds for it isn't large enough.
Related: Don't Make These 10 Startup Mistakes
2. A poor business model. Another reason startup companies fail is that many entrepreneurs are overly optimistic about how easy it'll be to gain customers. Although having a good product or service and an interesting website to promote it helps, it's only the start of the journey of building a successful business.
It's expensive to attract and win customers. In most cases, the cost of acquiring a customer (CAC) is higher than the lifetime value (LTV) of that same customer. With that said, many business models fail because entrepreneurs don't think about the relationship between CAC and LTV.
These are two questions you should ask yourself while forming your business model:
- Can I find a scalable way to gain customers?
- Can I monetize those customers at a higher level than my cost of acquisition?
Keeping these questions in mind will help you develop a better business model that keeps your CAC less than the LTV.
3. Too much work and not enough employees. Most startups have very lean budgets. Because of this, it’s often hard for these growing companies to keep up with the amount of work that flows in. More work means more sales, but often that money doesn’t turn into profit. Instead, it turns into another payroll slot or an increased salary.
A possible solution for this business woe is to outsource as much work as possible. Many professional contractors are available for hire for much less pay than your employees are. However, if you don’t want to outsource work, try boosting company morale and rewarding exceptionally productive employees to see you through the short-staffed time period.
4. Not enough funding. Last but not least, another reason startup companies fail is because they either run out of cash or can't find the funding to stay afloat in the market. It's vital for you to understand how much cash you have at all times and whether the amount will carry your company to a successful milestone when financing or when a positive cash flow will become available. Assuming that your startup company will gain instant profits will lead to you to eventually drowning in the market.
Essentially, you should plan for the worst and expect at least two years to pass before your startup company starts turning a profit. Make sure that you create a detailed budget that'll help sustain your business during those tough times. After you've figured out how much capital you'll need to have in the bank, add another 50 percent just to be on the safe side. The key to sticking to your budget is patience. Rushing to expand too quickly will result in a loss of cash flow before you know it.
Related: Mark Cuban's 12 Rules for Startups