Why over 85% of Small Businesses Fail

Nov 25, 2011

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Small Businesses Fail – But Why?

Perhaps you already know that the failure rate in small business in the United States is very high. At least 85% and maybe as high as 98% of new small businesses fail before they hit the five year mark. 70% of small businesses go broke before their 10th anniversary, according to the Small Business Administration. Most statisticians and accountants believe that the reason for that failure is under capitalization and poor fiscal management.

What Do Experts Think?

World famous marketer and multi-millionaire Dan Kennedy said, “I can point you to businesses that have failed with enough money to do everything they needed to do ten times over. And some management consultants will tell you its poor management ability. I suggest to you what it is in most cases is that the business owner decided that once he or she was in business they didn’t have to sell.”

Rich Schefren, a leader in the internet marketing community and millionaire-maker said that these businesses fail because of “lack of knowledge on the part of the owner.”

Michael Gerber, the world famous author and mentor to small businesses outlines in his book that one main reason that small businesses fail because the owner is typically a skilled technician but lacks knowledge and skills in the area of business management. Gerber outlines many other specific ideas that help small businesses understand the dilemma that inevitably faces them. FYI – if you haven’t read E-Myth by Michael Gerber, you need to do that very soon. Gerber speaks of systems, processes, employees, roles, knowledge, strategy and more.

Something To Consider – Strategic Marketing

The truth is that there are many reasons that small businesses fail within the first 5 years. So what are the reasons? Why is the tipping point 5 years? Although we don’t have the answer to these questions and certainly no one is the final authority on the subject, there is a pattern that many marketers have pointed out that you may have not considered.

Both the Counselors to America’s Small Business (SCORE) and the U.S. Small Business Administration (SBA) define the variable for a proper marketing budget to be between 2% and 10% of sales. This figure is rarely on the radar of a small business owner and most small business owners do not know their marketing spend. Most marketing strategies and plans are poor and even at times non-existent. Typical small businesses attempt to grow “organically” and focus on generating leads strictly via referrals. Most consumers hear that referrals are the cheapest marketing, which is true. However, starting a business without a real marketing plan that encompasses more than just referrals is crucial because referrals are NOT predictable and are rarely a sustainable way to start and grow a business. Most successful businesses have a specific approach for generating referrals in addition to other mediums outlined in a strategic approach.

What small businesses need is a strategy to stick to that is custom crafted specifically for the business. If you are a small business owner, do you have a marketing plan drafted on paper that you can refer to or give a potential marketing consultant or staff member to help them understand your strategic marketing plan?

The Take Away

If you listen to most of the intelligent business and marketing leaders, most of them are saying that small business fail due to poor marketing and sales, which begins with a lack of strategic planning and a strategic marketing plan and is followed by a poor sales system. Specifically, they fail to have a strategic marketing plan, they fail to create the proper marketing material, they fail to get great sales material in the hands of their sales people, they fail to use proper selling techniques, they fail to hire competent sales people, they fail to properly train sales and marketing staff, and they fail to focus on sales almost assuming that if they build it, the sales will come. In short, the fail to focus on sales and marketing. In all reality, most people who start small businesses aren’t sales people nor have they had success selling or creating sales systems in the past.

As a general rule, if you build it, they will come doesn’t happen in small business. It doesn’t happen in internet marketing either. The only way to really have a great business is to be able to generate consistent leads and customers and be able to estimate how much product or service you will sell from month to month and year to year. A strategic marketing plan and sales system must be created and developed for the business in order to provide predictable and sustainable growth.

Author Info: Gaydon Leavitt is the President of Innovation Simple which takes a strategic marketing approach to small business. Innovation Simple doesn’t just build websites, they build businesses and actually help write marketing plans and strategic plans for businesses. Innovation Simple as a managed marketing provider for helping create and develop marketing plans and materials for small businesses in today’s market.

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