Myth No. 1 – Most Small Businesses Fail After Two Years

Reality: While it varies slightly by business category, geography and size of business, around 80% of SMBs are still in business after 1 year. This drops to 66% at the end of two years, and 51% at the end of 5 years. So in essence, without some attention to the causes – you have about a 50-50 chance of survival after 5 years. The failure rate is typically overstated because these figures include business that were successfully sold or merged with other companies. But while overstated, the risk of business shutdown should be a rally point for every owner.

Myth No. 2 – The Economy Dictates SMB Failure Rates

Reality: Some categories are more impacted by the economy than others, and there are local factors as well – but the SMB failure rates have been fairly consistent for many years – so there are obviously factors other than economy at work here. The failure rate by category can vary; for example, health care businesses have the lowest 5 year failure rate at 39%, and construction firms have the worst at 64%. FIRE (finance, insurance and real estate) businesses are only slightly better at 61%, but it’s important to see these stats only measure business closure – they don’t account for successfully selling a business to another which we see as a factor in the FIRE number. You can find out some really interesting details at these two sites. U.S. Census  https://www.census.gov/ces/dataproducts/bds/  And the Bureau of Labor Statistics https://www.bls.gov/data/

Myth No. 3 – Under-funded businesses have the highest failure rate

Reality: This is partly true. Banks and others may say you need to have more capital funding to drive the business – but we find this is not always the case. Be wary of those wanting to loan you money. We find that a lack of revenue is the leading issue causing a business to be under-funded. According to the CEVOH Business Failure Study, the poor product and service offering leads to revenue shortfall and this leads to under-funded business structures. So the real cause here is poor products and services. Here are the four most common reasons poor products and services:

1. The business is unsure what the customers value and need

2. Products and services offered don’t provide clear value and meet the needs of key customers

3. The products and services do not have an easy path to the customer – most common causes: lack of sales channels, poor alignment of business hours with customer needs, business is difficult to buy from

4. Compared to other choices, products and services don’t do what is promised, or are otherwise unremarkable (when this happens, the product and service offering becomes a commodity and the business has to compete on price – a rough road for SMBs)

Download the full  CEVOH SMB business failure report here.

Myth No. 4 – SMBs struggle to grow because they don’t spend enough on promotion

Reality: According to a CEVOH proprietary study, the largest of its kind, the opportunity here is not necessarily spending more, but geting better value for the advertising/promotion dollars spent. We find that the majority of SMBs do not get the promised value for the services they commit to. Advertising and Marketing Promotion spending by SMBs often account for significant spending and is only effective around 50% of the time. This is a double hit: Effective spending on advertising must receive a return on investment. This puts financial strain on the sustainability of the business. What’s worse is that many of these advertising expenditures lock the business into a year long contract. This is often not the best option for a small medium sized business.

See the CEVOH report on SMB advertising spending here

Backlink to CEVOH focus on advertising

Myth No. 5 – SMBs must open a storefront location to do business.

Reality: In the virtual world, more business than ever is conducted remotely. A small retailer now has access to world markets thru on-line sales. A service company can develop affiliations to work in multiple locations. And even the health care industry is embracing remote doctor visits. 97% of consumers go online to research local products and services. But this is changing – as more than 68% of consumers are now broadening their definition of local beyond a traditional distance. This is because of delivery to the home or a hub, and because much greater choices can be obtained from what can be found nearby.

Myth No. 6 – SMBs must provide lower prices on products and services

Reality: The real key here is value. For a business to be competitive, the products and services should have discriminators over other choices. Typical discriminators include higher quality, more quickly available, improved expertise that meets the customer needs, etc. There can be many relevant discriminators that get combined to provide a better value equation for the customers. When this is met – many studies and actual results show that customers will pay a price reflecting this value. A common mistake of SMBs is to try to price goods and services at a level they cannot sustain – as their supply chain is not as powerful as a box store, large franchise or nationwide online distributor. CEVOH has significant experience helping businesses create value and increase discriminators for goods and services.

Read More on CEVOH Value Creation backlink to value creation