Small Businesses Fail for many reasons; in fact, 50% of them won't reach five years in business. Financing and cash flow are the top contributors to small business failure, according to a study by Insurance Quotes. However, the next most common culprit isn't as obvious to first-time entrepreneurs. Lack of customer demand is to blame 42% of the time.

Why small businesses fail

Starting a small business is a risky venture. There are 28.8 million small businesses in the U.S., but 20% fail in the first year, 50% fail by year five, and 70% won't make it past 10 years in business.

Why? There are several reasons, according to Insurance Quotes and Small Business Trends, and often more than one factor contributes.

  • 82% experience cash flow challenges
  • 42% discover there is no market need or demand
  • 29% simply run out of money
  • 23% don't have a successful team in place
  • 19% can't outperform the competition

Having a great idea isn't enough

Many people launch their entrepreneurial career because they have a "lightbulb moment"—a big idea they believe is worth thousands or even millions of dollars. The entrepreneur may be solving a problem in their own life or perhaps found a significant flaw in an existing product or service. Regardless of the reason, too many would-be entrepreneurs dive into their new small business without verifying that their idea is viable.

In other words, these business owners have no idea if there is market (customer) demand for their idea. It may feel like such a great concept and seem like there is an obvious market, so market research and testing is overlooked when forming the new small business.

It's fairly easy to start a new business in the U.S. (and many other countries), and the lure of the entrepreneurial American Dream is powerful: work for yourself, choose your schedule, no boss to answer to, and endless potential for wealth.

Unfortunately, people who jump into their new venture optimistic and over-confident often struggle to succeed. They invest countless hours and dollars into their great idea, and then have trouble selling their product or service.

How to avoid this small business mistake

Having a so-called "million dollar idea" isn't a bad thing, and it doesn't mean you should avoid starting a business.

But that great idea isn't enough to get started. Even if the product or service seems obvious to you (and even if friends and family share your enthusiasm), it's critical to verify that there is customer demand. There are several ways to do this:

  • Conduct market research by talking to your target customer base, via surveys, forums, social media groups, etc.
  • Pre-sell your product or service online to ascertain interest before investing thousands of dollars into it
  • Launch a crowdfunding campaign to raise money while also discovering if there is widespread interest in your idea

Once you validate your idea, start by creating and selling a "minimum viable product." In other words, don't spend months or years building your idea to its fullest potential before you start selling.

Instead, start with a simple or stripped down version of your product, the most basic version that people will still buy, and iterate continuously from there. This way you will have sales rolling in, along with valuable customer feedback, as you continue improving your product or service.