(portions of this article appeared in Entrepreneur magazine)
There are many reasons to become an entrepreneur, but no matter what yours are -- even if they don’t include getting rich -- your business still needs to generate a profit.
Without one, you can’t keep the doors open, and you can’t keep doing what you love.
Unfortunately, the majority of new businesses ultimately end up failing within the first few years. In large part, this is due to an inability to generate a sufficient profit, and it’s not a problem to scoff at -- even businesses built on solid ideas can suffer from a lack of profitability.
So, what prevents businesses from being profitable in the first place? Here are seven major problems.
1. Low prices
Setting prices is one of the first and most important decisions you’ll have to make for your business. How you set your prices could easily dictate your future success. Most entrepreneurs immediately caution themselves not to set prices too high; if your product costs more than your competitors', you could turn away your entire target market.
However, if you set prices too low, you’ll end up spending more in production than you can feasibly make back. Consider your margins carefully, and don’t be afraid to charge for quality. If you spend more time making your product better, people will be willing to pay for it.
2. Too much overhead
There are some things your business absolutely needs to survive. However, you may be overestimating your needs in some key areas. For example, do you really need that 3,000-square-foot office when you have only two employees you're running the business with? Do you really need to invest in that piece of machinery that adds only a marginal value to your finished product?
Think carefully about your overhead; if you spend too much there, you could create a hole too deep to dig out of.
3. Too many ongoing costs
It doesn’t take much for your business expenses to start spiraling out of control; and because expenses come in so many forms, it’s hard to pin down any one area where you’re bleeding money. Think about how many people you have on staff, what you pay your vendors, how much it costs to produce a single product and even monthly variables like utility costs.
For all these potential expenses, cheaper options likely exist, along with opportunities to make cuts. So, don’t overlook them.
4. Unseen or hidden costs
You may have a solid expense plan worked out, but there are some expenses you probably haven’t prepared for -- and they generally aren’t lumped into your “regular” expenses. For example, if your business runs into emergency repair needs, that event could instantly demand all the revenue you’ve made for the month.
If you aren’t adequately preparing for taxes or insurance costs, meanwhile, those could end up burning you, too. All it takes is a few unplanned expenses to wreck your profitability model.
5. Fierce competition
It’s possible that your expenses and prices are just fine, but you’re facing competition too tough to keep up with. For example, if your competitors have products similarly priced to yours but objectively better, you won’t sell enough to say alive.
So, find a way to differentiate yourself from the competition, and one-up them in at least one key area, whether that be price, quality or experience.
6. A lack of market awareness
You may also be suffering from a lack of market awareness; if your product is at an ideal price for both you and your customers, you still might not generate a profit if no one knows it exists. Your greatest tools to overcome this obstacle are marketing and advertising; they cost a bit up-front, but are well worth the investment if you plan them properly.
There’s a chance that you have a perfect way to make your business profitable -- but you’re executing too inconsistently for your business to reap the rewards. For example, your expenses may swing enormously from month to month, or your sales team might perform unpredictably based on individual variables.
Iron out these inconsistencies as soon as you can track them down. It may be tough to pinpoint exactly where your strategy is deviating, but it’s an important step if you want your profit to remain reliable.
These are some, but not all of the problems that could be stopping your business from generating a sustainable profit. You may be facing the problem from multiple angles, or you could be dealing with something else entirely, such as targeting the wrong market or failing to grow quickly enough.
If you’re currently struggling to generate a profit for your business, or if you can’t work the details out in your business plan, take these problems one step at a time until you isolate the cause of the problem. There’s always a solution -- or at least an improvement -- to be had.