Have you ever wondered why entrepreneurs keep on starting similar small businesses, even though the chances for success is slim? That’s right – the answer would be passion and potential. Entrepreneurs are “betting” their future on their small business, working hard to get theirs afloat. Some make it, some don’t. This is shown in stats, as follow…
40 percent of small businesses are profitable, 30 percent are breaking-even and 30 percent are losing money. Let’s just say that you chance for building a thriving small business is just 40 percent. That’s why only 50 percent of small businesses survive the first year, while only 5 percent survives after 5 years of operation.
As you can see, entrepreneurship is not easy. Yet, so many budding entrepreneurs are doing it, anyway. Why? Let’s take restaurants as an example.
Restaurants – up to 60 percent failure rates
Knowing the fact that restaurants – especially independent ones – are notoriously difficult to find success, I always wonder why people keep establishing new ones.
I never involved in a restaurant business; I don’t have a first-hand experience. However, from the people I know, they do know that success rate is fairly low. So, why they insist on starting one?
The answer is passion. They know they can offer quality and they are confident that they have a chance to make it big. Let’s just say that it’s kind of high risk, high gain opportunity.
I know some restaurateurs who are succeeding big time. But I know many more who are failing. From their success/failure story, I can learn that although they can produce a work of art with their dishes, many of them are not very good in running a business. One of the key success factors is their ability to run a restaurant like a proper business.
You see, restaurants, just like any other type of businesses, requires you to be able to run the business and wear many hats – like, well, a typical small business owner: Managing human resources, devising a growth plan, marketing, bookkeeping, and so on.
And here’s the cold, hard truth. Some from those who succeed are actually thriving due to the market situation and window of opportunities. They start at the right location and at the right time. So, a good managerial skill is not the ultimate factor to success. There are many factors contributing to success – that’s why restaurant business is a really challenging small business to start.
However, when a restaurateur is finally achieving success (read: keeping their business profitable for a period of time,) they make it really big. Some of the successful independent restaurateurs I know are reaching the ROI in less than a year. Some others are able to grow their food stalls into a proper restaurant and live well off.
Restaurants are just one type of challenging small business. There are more, such as retail stores and direct sales.
Retail stores – 80 percent fail within 5 years of operation
Ah, retail stores – the idea is pretty simple really: Source products, display them in-store, and sell them for a margin. Sounds simple, no? Yes – too simple, in my opinion: The thing is, there are thousands of others who are doing the same thing as you do. If you don’t differentiate and/or position yourself firmly in the market, you will get caught in the never ending price wars, which mean lower and lower profit margin.
Initial investment is often a problem – I know, I’ve been there 🙂 Furthermore, it’s all about location, location, location. You need to consider that while high-traffic location is great, they are costly. And if you have involved in retailing like me, you must have realized that your profits go down the drain just to support your staffs and rent.
Online retail stores? Even worse – barrier to entry is even lower than the brick-and-mortar counterpart; anybody can start an online retail store for pennies, literally. When you are going to enter the online market, your choice of niche and marketing effort are some of the most important key success factors.
Direct selling – 99 percent of direct sales reps loses their money
You know the drill – be a member/buy these products at discounted rate; sell those products for a margin – and don’t forget, recruit downlines and receive percentage of what your downlines are getting. Sounds familiar?
I’ve been there, too. Let’s just say I end up buying products and fail to sell them; several times, with a different companies. I am an “F” grade salesman who sells zero products/services. Let’s just say direct selling is not my forte.
Unfortunately, I am not alone; there are thousands of direct sales reps who are hoping they can copy the success stories they have heard in direct selling seminars. Some of them made it – and a few of them is making it big time. However, there are 1,000s of others who test the water and fail.
Some who have deeper pocket invest their money in products/services to sell. Many of the fail, losing plenty of money along the way. Welcome to the club of direct sales reps who lose money – the member accounts for 99 percent, which means only 1 percent who really made it.
It seems that direct selling business is notoriously difficult to keep afloat – but it’s not surprising, really. I do know a couple of successful direct sellers who are making millions of dollar annually.
As a business, one percent was a ridiculous figure – it seems like you are deemed to fail as you starting up. Yet, again, so many people jump into the direct selling bandwagon. Perhaps it’s due to the low investment requirement; perhaps it’s due to the success stories they have heard; perhaps it’s due the pitch by their leaders/upliners…
3 of the most challenging small businesses – in infographic
Want a bigger picture? This infographic can give you 3 of the most challenging small business paths you could take – or avoid, if you will.
Takeaway
Of course, I’m not saying that you should not open a restaurant, retail store or doing direct selling; the seemingly gloom and doom stats are the reality; if you have what it takes and do the right things, success is within reach!
Risks are great, but the reward is also great. Perhaps this is why people keep on starting a business in challenging niches.
However, there are potentially ways for a small business owner to improve his/her chance of success by following the best practices, as well as honing their business skills and acumen.
The infographic above can give you the basics of what you need to do to improve your chance for success. I recommend you to explore deeper on the key to success in small business.
From the tips mentioned, I would like to add “find a mentor with the know-how and experience in your niche.” You can start looking from the business networking events, expos, and from your local chamber of commerce with regard to mentoring program or someone who can – and more than willing to – mentors.
Moreover, if you are lucky, you can even get angel funding from your mentors – so, you can’t lose when you are learning from a mentor – the right one, that is 🙂
Okay, let’s hear your opinion: What do you think about the infographic? What do you think about independent restaurants, retail stores and direct selling as three of the most challenging small businesses to start – do you agree/disagree? Please share your valuable opinion by leaving a comment on this blog post!
Ivan Widjaya
Founder/Editor BizPenguin.com
