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Small Business Failure Statistics: How Many Small Business Fail and What Can You Learn From Them?
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Small Business Failure Statistics: How Many Small Business Fail and What Can You Learn From Them?

(Last Updated On: July 24, 2019)

 

There’s a lot that small business owners can learn from the failures of other businesses, particularly when those businesses were very successful previous to their demise. While statistics aren’t always the final word (or number), they definitely help to paint a clearer picture of how businesses perform. If you’re looking to discover some of the main causes of business failure and how to avoid them, you’ve come to the right place. Keep reading for insights into business failure statistics, and more.

 

Small Business Failure Statistics

 

When speaking about business failure statistics, there are several angles to look at the topic. Are you interested in business failure statistics according to how long a business has been around? Maybe you’re interested in small business failure rate according to industry. Below, we provide small business success rate statistics according to both of those factors, and then dig into the causes of business failure.

 

Small Business Success Rate by Age

 

Years Since Establishment

Rate of Survival

1

75%

2

63%

3

57%

4

52%

5

48%

6

44%

7

41%

8

38%

9

36%

10

34%

 

*Statistics sourced from Bureau of Labor Statistics.

 

Small Business Success Rate by Industry

 

Industry

Rate of Survival (After 5 Years)

Mining

51%

Manufacturing

48%

Services

47%

Wholesale & Agriculture

47%

Retail

41%

Real Estate & Insurance

39%

Utilities, Transportation, & Communication

39%

Construction

36%

 

*Statistics sourced from Census Bureau’s Business Dynamics Statistics.

 

4 Notable business failures

 

1. Blockbuster

For those of you who haven’t been around long enough to remember, Blockbuster used to be one of the hottest spots to be on a Friday night. In 2004, Blockbuster was at its peak. It was valued at $5.9 billion, had 9,000+ stores worldwide, and employed 60,000+ individuals. How did such a popular and widespread franchise crumble and disappear?

 

We know what you might be thinking: “Netflix is just too good to compete with”, right? While nobody here is going to argue against the attractiveness of Netflix, that’s not really the complete story. In fact, for the first few years, Netflix was exclusively shipping physically DVDs to its customers’ residences. So what did they do right that Blockbuster did wrong?

 

When customers would come into the store and realize that the movie they wanted to see was not available for rental, there was no reason for them to spend their money at Blockbuster. Even though in their later years Blockbuster had begun selling snacks and toys, it wasn’t enough to keep the boat afloat. The convenience that Blockbuster offered was too niche, and they failed to diversify their business model to draw in and retain customers the way that Netflix does today.

 

One of the biggest reasons that Netflix is so successful (aside from immediate access from anywhere at any time) is that it also acts as an entertainment curator for viewers. By offering recommendations of what their users will like to watch, Netflix encourages people to keep watching (hence the coining of the term ‘binge-watching’). If Blockbuster had been able to incorporate a wider range of services that their customers valued, their story may have been different.

 

The key takeaway: Blockbuster didn’t look at the big picture (no pun intended). That’s one of the most common causes of business failure. While digital technology would have certainly made its impact on Blockbuster, they could have adapted. In fact, Netflix offered to be acquired by Blockbuster in 2000 for a mere $50 million – but the offer was rejected. The rest is history.

 

2. Kodak

Kodak is another example of a giant corporation that fell hard. It hit its peak in 1996 with nearly $16 billion in revenue and a company valuation of more than $31 billion. Many people assume that the main factor that contributed to Kodak’s failure to maintain its position as an industry leader was its refusal to go digital. That theory is half true.

 

Actually, Kodak is the first company to have invented a digital camera. Despite that fact, Kodak underestimated the impact that digital technology would have on the photography industry. The biggest reason that they were reluctant to adapt was the immense success that they had experienced with film. The company was operating according to the old adage that “if it ain’t broke, don’t fix it”. Unfortunately, by the time they realized that something was broken in their business model, it was too late to recover to their former glory.

 

The key takeaway: Kodak was so focused on what had been working for them that they failed to see the value of innovation. They believed that the stronghold that they had on film photography would keep their heads above the water. They thought wrong. If Kodak had taken what had appeared to be a risk by riding the digital wave, they may have been able to remain competitive in the photo industry (with respect to both digital and analog technologies). In 2012 Kodak filed for bankruptcy.

 

 

3. Yahoo!

At its height, Yahoo was the undisputed heavyweight of the internet with a valuation of more than $125 billion. That was back in 2000. Fast-forward to July 2016 and Yahoo was bought out by Verizon for roughly $4.8 billion. What can explain their dramatic nosedive, and what lesson can business owners take away from Yahoo’s story?

 

Yahoo had many, many chances to get involved with new technologies and to acquire other companies, but they failed to read the writing on the wall. Nowadays, many of those companies that Yahoo had had the chance to acquire are lightyears ahead of where Yahoo was, even at its peak.

 

Those missed opportunities include:

  • A chance to purchase Google for $1 million in 1998
  • Another chance to purchase Google for $5 billion in 2002
  • A [failed] attempt to acquire Facebook in 2006
  • An opportunity to buy eBay
  • An opportunity to buy YouTube
  • A chance to be more competitive with Google in the ‘search engine’ arena
  • A missed chance to get involved with mobile technology

 

Perhaps one of most important factors to consider when discussing Yahoo’s causes of business failure was that it didn’t incorporate paid search advertisements within their organic search results (the way that Google did and still does). By the time Yahoo got on-board with the paid ads model, it was too late. Google had already reached full-steam and there was no chance of catching up.

 

The key takeaway: Yahoo underestimated its competition. They neglected to acknowledge that gaining an early lead doesn’t guarantee a long-lasting frontrunner position. It’s better to recognize and accept a good idea when it introduces itself, even if the idea isn’t your own.

 

4. RadioShack

While other big name businesses went bust because of their failure to adapt, RadioShack took a different path but still wound up in the same position. The most popular explanation of why RadioShack filed for bankruptcy in 2015 (and again in 2017) is, ironically, the same explanation of why it was so successful – its habit of adapting to trends in the electronic retail industry. While that worked for them for quite a while, today RadioShack is a mere shadow of the giant that it once was.

 

At its peak in 1996, RadioShack had over 7,300 store locations and a revenue of close to $6.3 billion. Less than twenty years later, we see the number of corporate RadioShack locations has dwindled to less than 100 and revenue has dropped by nearly 50% to just $3.5 billion. After operating for almost a century, what the heck happened to RadioShack?

 

As mentioned above, RadioShack was quick to ride the waves of new tech trends as they hit. In the 1970s they focused on radio, in the ‘80s they moved on to computers, and in the ‘90s they shifted to cell phones (phones, accessories, and service plans). But their strategy of continuously capitalizing on the products that ‘boomed’ was also their downfall.

 

 

As the mobile-phone market underwent a revolution and smartphones became less profitable, RadioShack was unable to come up with another ‘boom product’ that they could lean on. With affordable smartphones that can essentially do everything, what could RadioShack realistically have sold to keep their revenue up? Instead of taking a serious reassessment of their market and their business model, RadioShack doubled-down on the already floundering retail cell phone game plan.

 

What they arguably should have done was observe what their successful competitors were doing (i.e., Amazon and Walmart shifting toward the online marketplace). In sticking to their old business model, RadioShack also failed to recognize their customers’ move back towards DIY projects and the demand for the type of inventory they had held decades earlier. They had relied so heavily, for so long, on just a few highly-profitable products that they were unable to see how the old model, which had worked for them for years, was no longer viable.

 

The key takeaway: Similarly to Kodak, RadioShack’s success blinded them to the need to make a change to the business model. Their neglect to see the very real potential of online sales, and the change in interest of their customer base, was a fatal error. No level of success should ever get in the way of staying in touch with what customers want or what is objectively working. Of all causes of business failure, neglecting the customers’ voice is among the biggest.

 

Why do so many small businesses fail?

 

There are too many reasons for small business failure to list in one place, but there a number of reasons that small business fail which are reported more frequently than others. It should also be noted that business owners almost never attribute a failure to one factor; more often, there are several causes for a small business’s downfall. Here, we’ll touch on a few of the more common causes of small business failure.

 

Common causes of business failure:

  1. No market demand
  2. Not enough money
  3. Lack of effective marketing

 

1. No market demand

It’s all good and dandy to be confident in the usefulness and attraction of your business’s product or service. But if there isn’t a real demand for what you’re selling, your business is bound to fail. In fact, 42% of failed businesses site this as the reason for their crash. The service may have an objectively positive impact on one part of a market, but if it’s too niche and doesn’t address a more widespread demand in that market, there simply won’t be enough people out there spending their cash on your concept.

 

What can be done?

Study the state of the market, research where the demand exists, and come up with a plan to fill an existing gap. Is there enough of a customer base? Is your product or service scalable (learn more about scaling up)? Is it profitable? The answer should be yes across the board.

 

2. Not enough money

In the last year alone, more than 44% of businesses that have applied for funding did so because they needed help meeting operational expenses. Add to that the fact that 29% of startups reportedly fail because of a lack of cash and it becomes clear that a shortage of money has a serious impact on small business failure rates.

 

What can be done?

Statistics illustrate just how hard for many small businesses to get approved for business loans. In recent years though, fantastic innovations have been made in the field of fintech. Those developments have opened up financial possibilities that were out of reach for small businesses just a few short years ago.

 

One example of the power of fintech is the LendingScore™ technology developed by Become. LendingScore™ provides small business owners with a level of transparency that allows them to see how lenders see them.

 

The advanced algorithms that Become uses also connect business owners with the optimal financing solution tailored to their precise needs and unique profiles. All in all, Become makes the entire lending process faster, easier, and more likely to end in funding.

 

Plus, it’s completely free to use!

 

3. Lack of effective marketing

The days of spinning signs and sticking flyers underneath windshield wipers are gone (or at least one can hope!). While those are effective strategies to market a lemonade stand or a hotdog cart (not to knock either one of those), they’re not effective when it comes to marketing a business that you want to grow into a real money-maker. According to CB Insights, a whopping 14% of small businesses fail as a result of a shoddy marketing strategy.

 

What can be done?

First and foremost, any and every small business will want to incorporate social media marketing into their overall marketing strategy. That in-and-of-itself will help business owners avoid becoming part of small business failure rate statistics. The reasons to use SMM are abundantly clear:

 

  • It’s free
  • The audience is humongous
  • Connect with customers organically
  • Develop trust and reputation
  • Market insights directly from customers

 

 

Which industries have the lowest success rate, and why?

 

The two industries that have the lowest success rates of all are construction and retail, with global failure rates exceeding 20% and 13% respectively. Those numbers are eye-openers, that’s for sure. But what explains those double-digit failure rates?

 

For construction, one of the strongest factors that raises the rate of failure is the unpredictability of the housing market. Since so many small and medium-sized construction businesses work in the residential sector, the ups-and-downs in the housing market are reflected in the survival rates of construction business owners.

 

Regarding retail, the most likely explanation for such high failure rates is a combination of two parts: big corporations taking over along with the booming trend of online shopping. Despite the imbalance of resources and power, small retailers can compete with big corporations if they play their cards right.

 

Which industries have the highest success rate?

 

The two industries with the lowest failure rates are mining and manufacturing, with success rates exceeding 51 and 48% respectively. Advancements made in manufacturing technology are partially responsible for the strength of that particular industry.

 

Women-owned business: Failing or thriving?

 

All of the statistics seem to point towards great success for female small business owners over recent years. Approximately 40% of all firms in the U.S. are female-owned, and they make up roughly 20% of all firms that earn over $1 million in revenue. Additionally, more than 4% of all female-owned businesses earn more than $1 million in revenue, and close to 8% of all American employees work at female-owned businesses.

 

Even so, there still are drastic differences between how well female business owners are doing when compared with their male counterparts. If recent trends are a signal of what’s to come, then the world of business will continue to move toward make gender equality a reality. For the time being, we’ve got a ways to go before we reach the goal of complete fairness between genders in business, and indeed in society more broadly.



How to ensure your small business survives

 

Smart business owners learn from their mistakes. Smarter business owners learn from the mistakes of others. There’s no point in suffering needlessly – why try to reinvent the wheel only to crash and burn? See how other businesses succeed, study why other businesses have failed, and be sure to stay open to new information.

 

For continued survival, your small business will need to learn how to adapt to new technologies, keep on improving customer experience, tweak SEO practices, and much more. There’s no perfect equation that will guarantee survival, and that’s why a responsible and knowledgable small business owner will remain flexible. Since the business ‘ecosystem’ is constantly changing, small businesses must be able to change as well in order to stay in the game.



Access to capital: How to ensure your small business has the funds it needs

 

Step-by-step guide for applying for a business loan:

  1. Choose your desired loan amount and select ‘Get Loan Offer’
  2. Fill in the requested information (including time in the industry, revenue, business, etc.)
  3. Submit your business’s checking account information for analysis
  4. Wait for offers. You can also review your status by clicking ‘Access Your Loan Application’
  5. Review offers and select your preferred lender and terms
  6. Receive the funds to your business checking account
  7. Review your tailored LendingScore™ dashboard to improve your funding options
  8. Improve your rates – if your LendingScore™ is insufficient, follow the personalized plan (8-12 weeks to unlock funding)

 

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Disclaimer: The information contained in this article is provided for informational purposes only, should not be construed as legal advice on any subject matter and should not be relied upon as such. The author accepts no responsibility for any consequences whatsoever arising from the use of such information.