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10 Obvious Reasons for Failure of Business Model

We come across many people who start their own business but had seen a failure at some point in time. There are a lot of things to be kept in mind if you have a business or planning to have one. You should have good management skills to run your business smoothly.

I once met a guy who was an alumna of IIM A and started his own business. Guess what! He failed three times. He failed to do proper market research.

Any institute, does not guarantee that you will be successful in running your own business. It teaches you everything you need to know from their side. Rest is your duty that how you implement it.

We will be discussing 10 major reasons why a business model fails and what are areas in which they are lagging.

What’s in it for me?

  1. Introduction
  2. Reasons for Failure of Business Model
  3. Conclusion
  4. Frequently Asked Questions

Introduction

As per IBM Institute for Business Values in Oxford Economics, 90% of Indian startups fail in the first 5 years. One of the biggest reasons is the lack of needed innovation.

patents-filed-in-2016-in-Asian-countries
Patents filed in 2016 in Asian countries

The actual disruption and innovation do not exist in the Indian entrepreneur. In 2015, India faced a very bad experience such that the funding for startups went very low. In 2015, startups got the funding worth $7.5 billion.

On the other hand, in 2016, our startups were able to attract a fund worth $3.5 billion only. The amount went down drastically. No energy could be seen in our startups that could attract funds to start their business.

Today no investors are ready to invest their money because we Indians do not know how to develop and maintain the startups.

The most popular 10 cities of the world regarding the ecosystem of startups are Silicon Valley (United States), New York City (United States), Los Angeles (United States), Boston (United States), Tel Aviv (Israel), London (England), Chicago (United States), Seattle (United States), Berlin (Germany), Singapore (Southeast Asia).

Mostly the listed cities are American. India does not exist on this list. Bangalore holds a rank in the world but not in the topmost cities.

The reasons behind the failure of such a huge number of Indian startups are stated below that need to be worked upon.

Reasons for Failure of Business Model

Missing Innovation around Customer’s Money-Making Model

Every business person first calculates their money-making model and not what is the money-making model of their customers and from where the customer will get success. Now, how will a customer get success?

Until and unless you will think of their profitability, liquidity, growth, productivity, gross margin, revenue, inventory turnover, cash flow, brand equity, customer acquisition, their retention, and also their speed of the transaction.

From where does the innovation come? What problem are you solving in your customer’s life which he cannot solve it on his own?

When you find the answer to this question, innovation takes place.

Where there is a customer’s need, innovation takes place.

Even if we understand the needs of the customers still the Indian startups are such that they are very good at making a copy.

For example Ola (India) against Uber (America), Oyo (India) against Airbnb (America), Flipkart (India) against Amazon (America), and Gaana (India) against Spotify (America).

Even if they are trying to understand the need of the customers, they are just copying the American companies. Till now no such big innovation has taken place in Indian startup that has spread worldwide. 

Negative Cash Flow and Negative Working Capital

This is one of the biggest reasons for failure of any business model. Cash is known as the blood of the company. Without this, no startup can run their business. It is been said that

A cheque in hand means nothing. You need cash.

Cash is as important as profit. A firm requires both. It may happen that the book of account is showing a profit but the customers are delaying the payment. The money is not getting recovered from the customers. This is known as negative cash flow.

One needs the cash as working capital to run the business. Lack of this leads to the search for the funding agencies. After reaching a certain level those funding agencies also stop providing funds to the company.

Hence, this is the biggest reason to destroy Indian startups. Some of the most funded Indian startups that closed are Askme.com, Auto Raja, Talentpad, Fashionara, Cab Auto, and Frankly Me.

These were huge funded startups that shut down. A startup should maintain positive cash flow. The product that the business sells, they should try to get the payment in advance or in time.

Expansion with Negative Margin

negative-margin-of-business-with-graph-going-down

The second point was about the cash flow. This point is about the margin. Many startups think that first acquire the market, follow the loss-leading strategy and acquire the whole market by selling the product at a cheap rate.

This will lead to an increase in the valuation and if this proves to be successful then they will try getting the fund from different sources and run the business.

To sell their product at a cheap rate the startup starts compromising with their margin. One should be pre-planned when and how to cover the margin.

To sell the product at a cheap rate and acquire the whole market, if you are not prepared for the deep pockets you will repair it for your whole life. And then the company will be shut down.

Lack of Talented Manpower

manpower-and-teamwork-in-business

Any startup must have strong manpower that has high potential, performance, skills, and high will. A startup should have the manpower of highly capable people.

Competency mapping and competency assessment of manpower should be done. Do you have such people who can execute your visions and ideation, are most talented, and work in enthusiasm?

Understand and find their edge and energize and engage them. If you have an idea, capital, etc., but do not have strong manpower then you cannot grow your business.

Scalability with recurring revenue model

The scalability and recurring revenue model are two different terms. Scalability means one should find the way how a business model can become scalable.

Some startups are very profitable, some have a very good margin and some work very well in their specific local region. But to make a business scalable they do not think about it.  

Even if the business is spreading or capturing the new market area, are they able to retain their regular customers? Is your customer giving recurring revenue?

Do you have an assured customer who works with you for long contracts and always stays connected with you?

Some businessman runs after the new customers and in this way the old customers are left behind. So, the business model should have scalability and revenue recurring models.

Mixed Marketing Signal and Wrong Positioning

The main problem is that many of the startups do not know how to position their product in the market. Who are you? What is your identity in the corporate world? Who are your perfect and imperfect customers? What is your perfect and imperfect product?

There should be proper planning of the product and segmentation of the customers. A business cannot sell its product to everyone.

One should do perfect market demography and psychographic research as per their product and then they should present their product at that particular place.

Search for a single signal which will form your identity. Are you the newest one, problem solver, best in the market, convenient, cheapest, provides the best value, is most prestigious, has maximum features, and most reliable?

Similarly, there are many types of positioning. When you will find your identity in the market, based on this you will do your packaging, branding, marketing, presentation of the product, take out the scheme, policy, and prepare the backend team. This will show your market planning.

Let us take an example of ‘Thums Up. They give a single signal “Thums Up, Taste the Thunder”, “Aaj Kuch toofani karte hai”. Hence, the company knows what their target market is and how to sell their product. This is known as ‘Product Positioning’.

Releasing Product as a Laggard

Laggard means someone who takes more time than necessary or someone who lags. Do not become a laggard. Some businessmen present their product in the market when the whole market is in the position to become saturated.

They find that the product they have manufactured is already there in the market. This leads to a huge loss for them as no one buys their product because the product already exists in the market.

When they see that the product is kept idle as no one is purchasing it, they start giving discounts, run different types of schemes, decrease the margin and start giving credit which ultimately kills the business.

One of the biggest reasons for bringing your product late in the market leads to shutting done of the business as no customers buy your product since your competitor is stronger than you. All the customers are attracted by your competitor.

Save Yourself from Getting Outcompeted

You have started a new business but your competitor is keeping an eye on you what you are doing. They always keep themselves updated on each and every step you take. One should be prepared for that.

But how? By creating an entry barrier. How to create an entry barrier? By taking intellectual property rights, patent and licensing and proprietary technology one can save their business.

You can plan such type of things which will not let your secrets reveal to your competitors. Try to improve your brand equity.

By building economies of scale you can purchase your raw materials at such a low rate. So that your product pricing is less than the competitors. They will just keep on thinking that how are you able to sell your product at such a low rate.

You should create a red line between you and your competitors such that no one can cross it. There should be a pre-planned strategy from starting to creating an entry barrier to be ahead of your competitors. 

Missing the Process of Converting Feedback into Feed-Forward

One of the mistakes that a business does is customer gives you the feedback but you do not convert it into feed-forward. Customers inform you about the problems they face while using your product and you think that they are asking for a discount.

But this is not true. The customers are giving a signal. There is a great saying that

“Complaint is a gift, catch it.”

The customer wants to be with you but only the thing that they are expecting is to change yourself. That means they are facing little problem using your product.

They are asking you to bring a bit of change to the product. If a customer is not complaining then it is not good for your company. This is a signal. They silently shift to your competitor and start using their product. So, always try to take feedback from your customers.

This helps to improve your product, bring changes in your product and hence convert the feedback into feed-forward. The first product is only for a trial basis. Your first product is never your final product. Many improvement cycles take place.

The Business Model of Building a Complete Ecosystem

This means one person is dependent on others for their livelihood. This forms a web. Never do business in isolation. Do it together with the society and community and form an ecosystem.

Examples of ecosystems are like ‘Facebook’. Imagine the world without Facebook. Similarly, ‘Youtube, where you can find a lot of videos as per your requirement.

‘Paytm’, which is used by many people to make the payment or to do any transaction digitally. ‘Amazon’, where you can buy anything at a reasonable price.

Google, its android is a very good example of an ecosystem. Google created a platform where people who make android applications and launch them for free. This created a problem for the mobile handset makers because now android has a huge presence in the market.

So, now they have no way but to manufacture android compatible mobile. When they make such types of mobiles the android applications also start increasing.

All the benefits ultimately go to Google because Google did not work alone but is connected with the whole world. So, never do business in isolation.

Create such things such that the world gets benefits due to your existence. The day you are not in the market the whole world stops working. Start planning from a small region and spread across the whole world.

Conclusion

These were some of the reasons why our name is not there in the global presence, why our cities are not named in the list of top 10 startup cities in the world, and why our big corporations are not shining or making an influence in the world.

We have seen so many reasons why a business model fails to run profitably. It is the responsibility of the owner of the business to keep a watch on every field, every aspect of the business which may hamper their operation.

Frequently Asked Questions

How business failure can be controlled?

I have explained the different causes of business failure above in detail. Those are the areas that you need to take care of if you have your own business. 

How can business failure be caused by poor leadership?

Yes, business failure can be caused by poor leadership. A leader is the one who keeps his team members motivated.

Also, show them the path to reach the ultimate goal. Hence, any negligence in leading a team will lead to the failure of the business.

What is the primary cause of business failure?

A very basic and primary cause of business failure is a lack of market research. Many of the businesses fail just because they do not know very well about their target market, about the customer’s demand, their competitors, etc.

Explain briefly the business failure and financial distress.

Finance plays a major role in setting up a business. You cannot set up a business without funds in your hand. This is also a very tough task to raise funding.

Hence, from where to acquire funds, from whom, and how much is the matter of fact and is very stressful.

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