Common Reasons Small Businesses Fail (and How to Avoid Them)

Every neighborhood and strip mall has at least one — that rotating storefront that seems to change into a new business every six months. Maybe it started as a new record store, and then it was a specialty cocktail bar, then an ice cream shop.  

Just as soon as these new small businesses set up and open their doors, it seems like they close shop just as quickly. These constantly changing storefronts can be a scary reminder that small businesses can come and go in no time at all — and that entrepreneurship is inherently risky.

According to the Small Business Administration, only half of all new businesses survive for the first five years, and only one-third of new businesses make it past the 10-year mark. Forbes reported a statistic that paints an even more grim picture. According to their data, eight out of every 10 new businesses fail within the first 18 months.

While those stats might be disheartening, they don’t mean that your new business is doomed. Many small businesses fail because of a clear, definable mistake — a mistake that other entrepreneurs can learn from and proactively avoid. By understanding, recognizing, and solving these errors, you can arm yourself with the information and tools needed to challenge the odds.

To make sure your new storefront opens with the best chance of success, we’re breaking down the most common reasons small businesses fail — and what you can do today to avoid them.

Mistake #1: Opening a Business in a Market With No Demand

Let’s say you have a passion for crafting and serving one-of-a-kind, elaborate cocktails — so it makes sense to turn your love for mixology into an intimate bar with a carefully curated menu. But the potential storefronts you’re eyeing are all in quiet, family-friendly areas that close at 8 pm. Chances are, if you opened your cocktail bar here, there wouldn’t be a ton of demand, simply because it’s not the kind of audience that would choose a cocktail bar for their evening outing. And now, right off the bat, your business is facing an uphill challenge.

The service or product you’re envisioning for your new store might seem new and exciting for the market, but if it’s too niche and doesn’t address a large demand, there won’t be enough people spending money on your concept.

How to Avoid It

Before you move forward with your business concept, make sure you do your research and study the state of your target market. Learn more about your future customers’ interests and needs, and take the time to research existing businesses in the area.

Where is there demand? What types of businesses are missing? Are there enough potential customers to build a strong base of patrons? Armed with those insights, you can develop a plan to fill that existing gap strategically — and guarantee you’re opening your doors in a market that will have demand.

Mistake #2: Getting Lost in the Crowd

You may have landed on a business concept where there’s genuine demand, but that’s just one piece of a much larger picture. If there’s a lot of demand, chances are there are a lot of competitors, too.

Without any real differentiators or competitive edge, you might still see sales plateau or plummet — even when demand has never been stronger. That’s because in a sea of similar restaurants, storefronts, or bars, it can be hard to stand out from the crowd. And most often, customers like to stick with what they already know.

How to Avoid It

Rising above the noisy and crowded business landscape starts with identifying your unique value proposition. What sets your business apart from competitors? How is the way you operate unique? Are there things your competitors are doing better than you? Where are they falling short?

You should be able to answer all of those questions easily. If you can’t, revisit your approach, services, or products to ensure you’ve landed on a business idea that won’t get lost among the competition.

Mistake #3: Not Marketing Effectively

In an age where “Google” is a verb, if you’re not marketing online, you’re not reaching as many customers as you could be. Nearly 81% of consumers research online before deciding where to purchase. Still, despite the importance of using an online presence to drive brand awareness (and sales), more than one-third of small businesses don’t have a website. Without one, they’re making it almost impossible for future customers to find them.

Think about how many times you’ve needed new clothes, home décor, or niche kitchen gear. How did you go about finding it? Chances are you didn’t just drive around town looking for the right storefront. You Googled exactly what you needed to find a place that’s near you.

How to Avoid It

For your business to thrive, it needs to be visible to consumers doing their online research. If you don’t have a website, make building one a top priority. You can start simple if you aren’t selling your products online (yet). You can drive demand by using your digital space to make your pitch and show why you’re different from your competitors.

Make sure you’re doing everything you can to show up in Google searches, drive traffic, and get clicks. Use popular keywords to drive better search rankings on Google. For example, if you’re opening up a new sustainable clothing storefront, target high search volume keywords like “ethical clothing companies” by using them in your website copy.

Don’t forget about social media. Use Facebook, Twitter, Instagram, and even TikTok to show off your products, get in front of customers organically, and encourage them to visit your store.

Mistake #4: Being Out of Touch With Customers

Today, it’s super easy for dissatisfied customers to air their grievances online after a bad business experience. If your patrons aren’t getting what they expect, there’s a good chance they’ll take their complaints online for others to read.

Convenience, speed, and a high-quality customer experience have become all the more vital to a small business’ success. All entrepreneurs need to take the time to really listen to customers and find opportunities to improve.

Businesses that neglect the feedback on their social media channels or don’t take the time to read and respond to Google or Yelp reviews miss out on straight-from-the-customer advice on how your business can meet their expectations. Without that data, you’ll become further and further removed from what your customers truly need. And that might stop them from coming to your store altogether.

How to Avoid It

In our digital world, it’s never been easier for customers to share their thoughts about businesses. But that means it’s easier than ever for businesses to monitor and solicit customer feedback, too. With 85% of consumers saying they trust online reviews as much as personal recommendations, make sure you’re making a concerted effort to dive into the recent Yelp or Google reviews.

Look at what people say across your social media channels. If socials aren’t giving you the insight you need, consider sending a customer satisfaction survey after someone visits your store. Knowing when and why a customer had a bad experience helps you actively work to make things better. This ensures not only more repeat business but that you’re genuinely delivering an experience that today’s customers want.

Ensuring Your Small Business Survives

Smart business owners learn from their past mistakes. Wise business owners learn from the mistakes of others. In other words, the most important thing to remember when opening your business is this — you’re not alone.

There are thousands of entrepreneurs who have already been in your shoes. So why try to reinvent the wheel? Take the time to learn from them, their failures, and their successes. Their past journeys can become your fuel to overcome common small business challenges and realize lasting success.

A wise captain once said, “It is possible to commit no mistakes and still lose. That is not a weakness — that is life.”

Sometimes, you can do everything right, and the business still fails. If your small business does happen to reach the end of its time, don’t give up! We understand how hard it can be to let go of this chapter, but dissolution doesn’t mean the end. Check out our article on ways to regroup, reignite that spark, and get back in the game!