You must have heard that about 85% of small businesses fail in their first year. But why then are so many start-ups and small businesses started? The reason is simply that a small business has the highest potential earnings out of all investment classes.
The news for small businesses making it past the first year isn’t too bad: two thirds of small businesses survive more than two years; and about 44% make it past four years.
The reasons for the high failure rate is often poor planning, inexperienced management, inadequate financing, poor location and other similar operational issues.
Those businesses that do succeed often do so because they have a strong value proposition for their potential customers. They do things differently to stand out in the market and reduce customers’ time and money or help them to improve their lives in some way.
Some small business advisers cynically say that many small businesses start because the owner was fired, retrenched or couldn’t find a job. But there are business people and owners who from the outset plan to do things differently so that they have a competitive edge in the marketplace.
They do this because if you come up with the same product or service that is already in the market, you face tougher competition and resulting low margins.
How do you differentiate or innovate as a small business?
You come up with something new or you take one part of an existing product or service (or even process) and change it.
Here are 5 sources of innovation for start-ups and small businesses:
1 New products or services: Most small businesses don’t start with a completely “new” product because they don’t have enough money to educate the marketplace. It’s different for big companies as they have deep R&D and marketing budgets and can take the knock if one of thei new products fails. Even for big companies over 80% of their new products fail.
2 Making existing products better, faster, cheaper: This is the route that profitable entrepreneurs follow. A knocked down version of a more expensive product stands a far better chance of success.
3 Buy a second-hand business and use your experience and expertise to change something that adds greater value: For example, if you have experience in IT and want to open a computer business, then you may not find the money in the hardware in your computer shop but the service of hardware and updating software, which attracts hugely higher margins.
4 Change a process to make an existing business concept better: A simple example is postal services were the post office is leaving so much money on the table because of its poor service that overnight delivery services are growing.
5 Design of an existing product: A source of innovation is the design in products were existing products can be made more ergonomic, aesthetically pleasing or easier to use. For example, the Oxo Goodgrips potato peeler devised by Sam Farber because his wife had arthritic hands and couldn’t use their conventional potato peeler spawned a business in easier-to-use kitchen utensils.
It’s not only valuable for you to come up with ideas for new products and services for your business but also to think of new ideas to improve your processes and change the components of existing businesses to set yourself apart and provide a far better investment returns.