Have you ever been told that most businesses fail in their first year? Learn the truth about business failure rates, why ecommerce puts you at an advantage and why you should be optimistic about your store's future.
Sometime in your first year of starting your business, you were probably warned that 9 out of 10 businesses fail in their first year. This unsolicited advice likely came from an in-law, a friend, an old colleague or someone else whose information came from an internet article—which they can no longer recall—rather than experience.
As with other popular-knowledge statistics, like the idea that we only use 10% of our brains, this one has no basis in fact. A quick look at the real numbers tells a much more optimistic story.
The numbers are better than you think
According to the U.S. Small Business Administration Office of Advocacy, not only to most businesses survive past the first year, roughly half survive into their fifth year, one-third survive more than 10 years and survival rates get better as the business grows older. And the SBA isn’t just thinking in glass-half-full terms when it says that half of new businesses survive, rather than saying that half of all businesses fail, because . . .
Closure is not the same as failure
Yes, the other half of those businesses may close, but that does not mean that they have failed. Statistics on those remaining businesses are harder to come by, but the U.S. Census Bureau estimates that “about a third of closed businesses were successful at closure.” The owners of these establishments may have left their venture for a variety of reasons—family, new interest, better opportunities, retirement—but the business was still profitable when it closed.
Small and home-based business stand the best chance
The same Census Bureau data also suggests that certain new establishments have a better chance than others. Namely, home-based businesses and small businesses with around $50,000 starting capital had an enviable survival rate.
Ecommerce can mitigate most of the reasons that businesses fail
But what about the remainder? The SBA lists ten major reasons that small businesses fail. Fortunately, ecommerce makes this list much shorter.
- Lack of experience – the internet makes self-education and a community of supporters available to entrepreneurs. It also allows them to outsource in areas where they feel the least experienced.
- Insufficient capital – a digital storefront cuts down on the overhead needed to start a new business. If you are able to supply your own products or find a supplier, the online store itself is relatively inexpensive to maintain, especially when compared to a physical storefront. Even those businesses that already rely on a physical storefront benefit from entirely new markets without having to build new locations.
- Poor location – setting up shop in the wrong location is no longer a concern when your location is virtual.
- Poor inventory management – drop shipping some or all of your product line can take the worry out of inventory management.
- Over-investment in fixed assets – if you are creating or storing products, some fixed assets will always be a necessity; however, ecommerce means offloading much of your businesses needs from physical assets to digital ones.
- Poor credit arrangement management – less credit is required to start an ecommerce store than to start or expand a physical store.
- Unexpected growth – with fewer physical needs, ecommerce is able to scale with growth much more easily than traditional retail. As long as you are capable of taking and fulfilling more orders yourself, unexpected growth can represent far more opportunity than it does risk.
- Competition – ecommerce allows you to reach a global market, making it possible to cater to niche interests with low competition and still find a large audience.
- Low Sales – the lower cost of starting an ecommerce store means being able to survive long enough for sales to begin to build.
The only remaining major reason—personal use of business funds—is also the most preventable.
Statistics are not predictions
Finally, keep in mind that none of these statistics were ever meant to be predictions. Even if 9 out of 10 businesses did fail in their first year, that does not mean you only have a 10% chance of succeeding. Business leaders that research their customers’ needs and commit to best practices will always have a better chance of ending up on the “survivor” end of the spectrum, no matter how the numbers are presented.