Why Do Most Small Businesses Fail?
If you’ve ever been interested in working for yourself, or starting a small business, you’ve heard the statistic that most small businesses fail within the first 5 years. Why is that?
The most common reasons given are:
- Lack of experience
- Being under-capitalized (running out of money before you achieve profitability)
- Poor location
- Poor inventory management (Not having enough of an item, or having too much which may suck up all your capital)
- Poor money management (poorly structed business loans, co-mingling of finances)
But I think the most basic one is lack of any business sense whatsoever!
I went to get a smog check for my car registration and I called up several smog check test centers within a 10 mile radius. I got quotes that ranged from $37 to $70. The fact that the highest quote was 89% higher than the lowest quote was quite interesting.
I decided that instead of driving 9.5 miles to pay $37, I could drive only 2 miles and pay $39.95. That’s a good compromise between time spent and money saved (especially in Los Angeles where it takes forever to get anywhere). However, I decided to stop at the first one I saw and ask if they’d do a price match, especially since the store was completely devoid of any customers. I asked them how much it would cost and was quoted a price of $65. I told them the store down the street quoted me $40 and the manager said that he knew the owner of that place and they indeed offer a $40 price, but he could afford to offer that price because they did a higher volume and made money on repairs too. The best he could offer was $55.
I tried arguing with him that they probably did higher volume precisely because the price was lower, and that his costs were fixed and the marginal cost of performing an additional smog check were significantly lower than $55 or $40 or even $20. When you consider that you have idle staff and idle machinery, the cost of running a machine for 20 minutes is just the cost of electricity which couldn’t have been more than a dollar. By price matching price-conscious customers, you’re engaging in a perfectly legal form of price-discrimination which allows you to attain your optimal profit levels. After wasting 3 minutes, I realized he wasn’t going to budge and he was perfectly happy to see me go 1/2 mile down the street to his competitor, which incidentally seemed to be running at 75% capacity.
So if you’ve ever wondered why some small businesses fail its because they’re run by incompetent morons who lack knowledge of finance, marketing, consumer behavior or sometimes just plain common sense.
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October 3rd, 2009 at 5:37 pm
The best part of owning your own business is to price discriminate against who ever you please based on their race, nationality, age, sex. Isn’t it, now?
October 4th, 2009 at 12:00 pm
Price discrimination is a legal and widely used tactic to optimize profitability. Just check out the 20% off coupons that Bed, Bath and Beyond send out every week. If you can’t be bothered to carry those large 5×7 inch coupons around, then you can pay the higher price. Otherwise, you get yourself a discount without much effort. It’s very smart if you think about it.
Ross Stores have senior citizen discounts, which is a form of age discrimination. Bars/Clubs have free entry for women which is a form of sex discrimination. Apparently, its all perfectly legal!
October 4th, 2009 at 11:09 pm
and movie theaters have student prices
October 9th, 2009 at 1:21 am
My family runs a small business and everything has been ok for the time being. I know some people, who are also in charge of a small business and things have not run well for them in the last months and that’s why the business went bankrupt
I hope that this crisis finishes asap and that small business survive.
October 12th, 2009 at 10:47 pm
Having enough financial capital to weather the downturns like this past 18 months was crucial for many businesses.
The other reason businesses fail is that people just give up. It’s hard to make big bucks in anything you do. Everything is relative and some might think blogging for anything less than $100,000/yr is a waste of time.
Hope to see you at FS one day!
February 5th, 2010 at 12:01 pm
This is a bad example. Let’s all charge as low as possible, and we going out of business very fast. What about profit? For some businesses more profitable do nothing than get involved and loose money in the long run.But it’s ok , price is going down anyway, cheap labor from China and Mexico. Some people work for rent and food.