Having an online small business is many people’s dream. Yet, very few get to live out that dream. Failure is very common among small businesses. 20% of online small businesses fail within the first year. After five years, the figure of online small businesses fails to increase to 50%.
That’s a lot of online small businesses to lose every 5 years.
Table of Contents
Online Small Business Fail – How to Avoid It!
This article will outline six main reasons why online small businesses fail. It will also provide possible solutions and actions to take to avoid such scenarios.
Building an online presence for your small business is no easy feat to accomplish.
1. Lack of Capital – One Reason Online Small Businesses Fail
It doesn’t take an MBA to know that working capital and cash flow are critical for a business’s day-to-day operations. Lack of capital is the number one reason small companies go out of business. Companies can experience financial hurdles for several reasons:
- Pricing is too low
Lowering prices can be a good temporary solution for acquiring new customers. However, low prices will eat away at profits over the long run as the margin will be too low to cover operating expenses.
Online small business owners should calculate the operating expenses required to bring their products to market. It’s best to avoid keeping prices too low for a long time. Another huge factor today is higher shipping costs.
For example, if you are making your own hoodies or other merchandise, consider how much you can save by collaborating with print-on-demand companies that have printing facilities and can ship locally.
- Overprojection of revenue
Some owners are way off with their revenue projections. Instead of cutting expenses, they continue, as usual, typically followed by business failure.
It’s essential to be realistic about the business’s trajectory and cut expenses when there’s less cash flow from revenue.
- No funding
Startups may have difficulty getting funding to bring their product to market, which can stop them from launching their business in the first place.
Startup owners should talk to as many venture capitalists and angel investors as possible. Taking out a business loan is another option.
2. Poor Cybersecurity Causes More Online Small Businesses to Fail
Cybersecurity is still a relatively new term in the business world, which is why it’s so dangerous. Many small business owners are unaware of the role cybersecurity plays in their business, especially if they operate online.
This lack of awareness leads to not having proper measures to recover from cyber incidents. 60% of small companies fail within six months of experiencing a data breach or cyber attack.
To prevent this, small business owners need to look at their security posture and implement adequate measures to minimize risk.
Here are some tips for small businesses to bolster cybersecurity:
- Use strong passwords and change them frequently with a password manager (like this one).
- Update all apps and operating systems regularly.
- Scan for threats with antivirus or firewall software.
- Educate employees about handling social engineering attacks.
3. Inadequate Management
Mismanagement is another common cause of business failure. Many small business owners lack proper business and people-management skills to handle finances successfully and oversee employees.
Without a management team, a lone business owner is more likely to mismanage certain parts of the business, sometimes resulting in failure.
Being aware of one’s strengths and weaknesses is part of being a good business owner. Hiring a management team should be a top priority to ensure long-term success.
4. No Business Plan
Poor business planning, or lack thereof, is a sure way to go out of business. Small online business owners often lack the technical knowledge to create a business plan.
Instead of avoiding the problem, it’s best to hire a business strategist to analyze the business and create a plan.
A good business plan should serve as a roadmap for how the business will achieve its goals. It should include things like:
- Competitor analysis;
- Capital needs, budgeting, projected cash flow;
- Marketing strategy;
- Opportunities and threats in the general market.
It should also include a full awareness of your procurement process and how you are going to make it work. For instance, how will you get access to all of the raw materials or products you might need to have in your business?
This is the kind of thing that can prove really important and yet difficult to get right, but it’s a vital part of any decent business plan.
Beyond looking for a buying assistant and making sure that you are keeping your options open, it’s just about having a good awareness of the kind of processes that can help make this work – and then putting that in your plan.
It’s also essential to regularly review and update the business plan to adjust to changes in the market or industry.
5. Growing Too Fast
It may sound counter-intuitive, but growing too fast can be a big problem that results in your business closing its doors. Sure, growth is desirable and should be strived for, but not without planning and effective execution.
Excessive growth happens when the business cannot keep up with the greater resource demand. Some business owners overvalue sales and look to scale the company at the first sign of increased revenue.
Sales numbers can be misleading and should not be the primary metric of a business’ health and posture.
Once excessive growth happens, it becomes harder to manage. There’s less attention paid to hiring the right people, management mistakes, and an inability to scale customer service.
This creates a snowball effect, leading the online small business to failure.
Before you start growing your business, go through all the necessary steps to ensure it’s the right move at that time. Conduct market studies, economic analysis, and a detailed financial evaluation.
6. Ineffective Marketing Makes Online Small Businesses Fail
Many online small business owners that fail are often reluctant to dedicate enough capital to meet their company’s marketing needs. A low marketing budget usually comes from owners underestimating the cost of marketing campaigns in the planning stages of the business.
Since marketing is a critical component of a business’s success, it should receive an adequate budget covering present and future marketing endeavors.
Strategy is also key. Marketing should be directed at the target audience to maximize sales conversion rates. If operating on a low budget, business owners can explore tactics like guerilla marketing.
Conclusion: Why Online Small Businesses Fail
Unfortunately, many online small businesses are bound to fail. Poor planning in the early stages is usually the leading cause of hurdles.
New online small business owners should create a business plan to tackle common issues. A business plan will help with budget planning, creating an effective marketing strategy, and stable growth.
Have you had an online business fail or known others to? I’d love to hear your thoughts on why and how to avoid it in the future. Please drop a comment below so we can discuss it.
She has 30+ years of experience in marketing/advertising with 12 years of experience in content marketing, social media, blogging, and SEO.
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