90% of startups fail. Most get through the first year or 2, but more than half of all small businesses crumble before year 5.
Why?
Businesses ultimately fail when they don’t make enough money. The startup either can’t afford to continue operations, or the owner quits to reclaim work-life balance and a better (more consistent) salary.
Factors like mediocre products, lack of demand, and tough competition get the blame, which is rightfully so.
But you’re not here for your startup’s post-mortem, are you? No, you’re here to stop the bleeding and start making money. Fortunately, you’ve come to the right place.
We spend a lot of time around startups (hence the name, Foundr), so we’ve seen it all. If your business isn’t making money, it’s not because of cruel fate or bad luck—there’s a reason. And if there’s a reason, there’s a fix.
Recent years have thrown novel challenges at founders ranging from global health crises to supply chain intricacies, making it harder than ever to build a profitable business. Add the plunging venture capital funding to the mix, and you’ve got a downright tricky situation on your plate.
Below, we’ll walk you through all the different causes for why your business isn’t making money. Not every reason will be relevant to your business (we sure hope not), but you’re bound to be making at least one of these profit-blocking mistakes.
Reasons You’re Not Making Money
You’re Overspending on Advertising
10 Reasons You’re Not Making Money (And What to Do about It)
Recognizing the issue is the first step. Next, it’s time to do something about it. Below, we’ll help you with both.
Whether your business stopped making money or never made it in the first place, you can get to profitability. You just need to walk the path of self-reflection and make the necessary changes.
Here are 9 likely reasons your business isn’t making money.
1. No Product-Market Fit
Solution: Start over or adjust your messaging to fit a market.
This cause is the hardest to swallow, and that’s why we’re starting with it first. Many startups fail because they tackle exciting problems rather than solving market needs.
While interesting problems often make for inspiring work, solutions don’t always make money. 35% of failed startups cite “no market need” as the reason for their demise.
Take Snapchat’s original Spectacles, for example. Snapchat came out with a high-end pair of video-recording sunglasses because, well, it seemed like a cool idea. They probably imagined legions of their platform users strolling the streets, documenting their life from the convenience of their eyewear.
That didn’t happen. It turns out there wasn’t a market for their sunglasses. Users didn’t have a problem taking out their phones to record their Snapchat messages, so they didn’t have a want (much less a need) to put a pair of glasses on their face to get the job done. The product tanked, and so did Snapchat’s profits.
Evaluate your product’s market. Do you have an audience for your product? Why would they want to purchase your goods or services? Is lack of an addressable market the reason you’re not making money?
Products solve problems—they don’t just satisfy entrepreneurial itches. If you can’t find a market for your product, you won’t make money. Here are your options:
- Find an audience that needs your product and market to them.
- Pivot your product to solve your target market’s needs.
- Cut your losses and abandon the product.
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2. Tough Competition
Solution: Upgrade your product by drilling down to your ideal customer needs.
Found a great idea for a business? Well, you’re probably not the only one. Where there’s money, there’s competition.
It’s not healthy to obsess over your competitors, but there can come a time when they deserve a bit more of your attention. If they’re dominating the space, undercutting your prices, and stealing the market share, you’re in trouble.
If your business isn’t making money because of tough competition, you need to make a change. Here are a few options:
- Pivot your product to address a different (less competitive) market
- Identify and market a unique selling proposition (USP) your competitors don’t have
- Upgrade your product to beat your competitors
There’s always a way to compete. However, sometimes, it’s pretty darn tough.
If a monolithic company (say, Amazon, WalMart, or Apple) is your competitor, think of what angle you can take to win customers. It’s not likely going to be on price or speed of delivery, but what else could it be?
- Hyper drilled-down niche
- Local expertise
- Lightning-fast customer service
- White glove setup, installation, or servicing
- Irresistible branding
- Sustainable and ethical products and manufacturing
- Company philanthropy
If these ideas don’t work, you might have to pivot your business. Do your market research and find a need that needs fulfilling that nobody else has tapped yet. That’s easier said than done, but it can be nearly impossible to make money as a startup if your market is oversaturated.
3. You’re Overspending on Advertising
Solution: Track the cost per acquisition from each advertising channel and cut those that aren’t worth your time and money.
There’s a fine line between getting your brand name out there and overspending on advertising.
Some forms of advertising can be extremely lucrative, and I am absolutely not advocating that you get rid of your entire advertising budget.
I’m talking more about those advertising channels and efforts that are costing more than they bring in. The ones you allow your ego to believe are “at least getting more eyes on your product.”
When it comes to advertising, especially advertising on platforms like Facebook or Instagram, you have enough information about what is working and what isn’t, so it’s crucial that you use those analytics and start to cull the ones that aren’t making you a profit.
Pretty soon, you will start to see trends develop regarding which audiences are resonating with your ads. This will allow you to continue to improve your targeting even further, maximize your cost per acquisition, and remove wasted, costly ads to an audience that isn’t interested in what you have to offer right now.
You can’t hide from the data, no matter what your gut feeling is about a target demographic!
4. Broken Business Model
Solution: Bring in a third party to restructure.
Sometimes, your business model is the component holding you back from profitability. Maybe your products fail in retail stores but excel online. Or perhaps your pay-per-click (PPC) marketing strategy doesn’t work, and you need to rely on affiliate marketing or influencers.
It’s not easy to reconstruct a business model, but the rewards are worth the investment. It’s easier than developing a new product or desperately searching for a product-market fit.
Thanks to fast-changing technology, economic, and political climates, business models that worked yesterday might flop tomorrow. For example, look at gyms and yoga studios. The industry took a $20.4 billion loss in revenue due to social distancing, remote work, contactless requirements, and state mandates. There might have been nothing wrong with their products, pricing, or market fit, but an external factor rendered their previous business model useless.
Some businesses try to boost their user base and gain market share over competitors by selling their products or services at a loss for a time. Amazon popularized this strategy, but few other companies have been able to pull it off. If you sell your products and services at a loss from the get-go, you might not be able to raise prices (and lower expenses) enough to become profitable in the future.
If a broken business model is keeping your business from making money, here’s what you can do:
- Get a new perspective. Talk to colleagues, other business owners, or even a consultant to figure out what’s working and what’s not.
- Look at your competitors to examine the pros and cons of their business models.
5. Pricing Issues
Solution: Reverse engineer your prices.
Pricing is a non-stop Goldilocks conundrum. Price yourself too low, and you might not be able to cover your expenses. Price yourself too high, and you might not bring in enough customers.
Finding the “just right” price point is the goal of every startup, but it’s hard to hit. Some businesses know they’ll be operating at a loss for a time, but they know they’ll hit profitability margins once they scale to a certain point. However, it’s not always possible to survive long enough to reach that profitable level.
Many entrepreneurs make the mistake of charging prices solely based on the competition or what feels fair. This doesn’t consider your expenses, desired salary, or what the market is willing to pay for your products.
If pricing issues keep your business from making money, reverse engineer your prices. Determine your costs of goods sold (COGS), operating expenses, and salary. Your product’s price needs to be at least high enough to break even, but you want to bring this number as high as possible to increase your profits.
Find ways to add more value to your products and services to justify a price increase. For example, fast-food restaurants add drinks to combo meals and charge a couple of extra dollars, while the soft drink only costs them around $0.20.
6. Poor Product
Solution: Pivot (maybe).
This one can be a sucker punch for entrepreneurs, but it’s a cold, hard consideration you need to look at. We’re not calling anybody’s baby ugly…but it just might be.
Some products are just crummy.
Consumers might not want your product because it’s unusable, unhelpful, unattractive, or too expensive. It might not solve any problems and be too costly to make. Or it might be too complicated for your target market to understand or want to purchase.
Fortunately, there are plenty of ways you can pivot if your product is to blame:
- Upgrade your product to solve a customer need and deliver more value.
- Find a more cost-efficient way to produce your product so that you can lower prices.
- Change your product to cater to market wants. Your product might just need a modern paint color to attract buyers.
Sometimes, businesses get caught chasing numbers, users, adoption, and market opportunity instead of perfecting their product. Now, that’s not to say you need a perfect product at launch—it’s not.
We firmly believe in starting with a minimum viable product (MVP). However, you should always look for ways to improve your product to satisfy your customers. If you have the right product-market fit, focusing on creating a better product will often land you more customers than solely searching for more customers.
7. Weak Goal-Setting
Solution: Reset goals using a proven system like OKRs.
Your goals, strategies, and tactics might not support a money-making business. Humble entrepreneurs often want to start a business to work for themselves—not necessarily to make more money or become “rich.”
Building a startup with the intention to be your own boss and enjoy freedom, satisfaction, and flexibility is great, but it won’t always make you money. To become profitable, you’ll have to get more intentional with your planning.
First, start with a goal-setting framework. We use OKRs (objectives and key results) at Foundr, as do big-time companies like Google, Intel, and Spotify.
Next, move on to your strategies and tactics. These help you create a game plan for how you will make your goals a reality. A strategy is a high-level plan for how you plan to achieve a goal, while the tactics are the step-by-step actions you need to execute to complete a strategy.
Another potential reason your business isn’t making money is because of your perception. One person might be satisfied with a business that’s making them $50K a year, while another entrepreneur would complain that amount “isn’t making money.”
You don’t necessarily need to change your perception—just understand that reality might be different than what’s going on in your mind. There are plenty of millionaires who feel like they’re not wealthy, so don’t get lost chasing a never-ending, insatiable goal.
8. Lack of Bandwidth
Solution: Ask for help and assess what you spend your time on.
You might not have the capacity to give your business the time, love, and energy it needs to make money.
For example, look at a restaurant. Most restaurants have enough overhead costs to justify being open as much as possible. If they can’t be open and make money every day of the week, they might not be able to afford utilities, rent, and salaries.
Is bandwidth holding your business back from making money? Do you need to offer more, stay open longer, or spread your business? Consider making some changes:
- Bring on a partner to share the load
- Hire a part-time employee or freelancer to take care of specific tasks
- Hire full-time employees to help expand your business
- If it’s a side hustle, consider ditching your 9-to-5 and going full-time
- Open additional store locations
You can get your business to run on autopilot, but it still needs time, investment, and guidance. You get out what you put in—if you want to make more money, you’ll likely need to put in more time.
Another option is to speed up your operations. More time might not be an option, but you can always improve your efficiency. When you improve your efficiency, you essentially make more money in less time.
9. Wrong Timing
Solution: Sunset your product or wait for better timing before investing more.
Sometimes, there’s nothing wrong with your product, prices, business model, or market—it’s all about the timing. As many businesses that launched during the pandemic know, timing is everything.
“If you’re not embarrassed by the first version of your product, you’ve launched too late,” says Reid Hoffman, founder of LinkedIn.
Launch too late, and you might miss out on the market opportunity. However, if you launch too early, you risk making a poor first impression. Once again, there’s an optimal Goldilocks-approved time to launch your product.
Vreal, a virtual reality (VR) platform, launched a product that was ahead of its time. They set out to build a virtual reality space where video game streamers and viewers could hang out, but the available hardware and bandwidth capabilities didn’t evolve quickly enough to support their solution.
“Unfortunately, the VR market never developed as quickly as we all had hoped, and we were definitely ahead of our time,” said the company. “As a result, Vreal is shutting down operations and our wonderful team members are moving on to other opportunities.”
Launching at the wrong time can be a big damper on your business’s progress, but it doesn’t mean it’s doomed to failure. You might need to hold on and wait out a storm, or you may need to pivot to better match the present (and future) circumstances.
10. Little-to-No Demand
Solution: Adjust your pricing and understand potential selling market.
You might find the product-market fit and nail your pricing, but if there’s not enough demand, you won’t make money. Your target market might be too small, or your product might not be a recurring purchase.
Riches are in the niches, but only for the right products. For example, if your business caters to a small niche, it’ll need products that can be repeat purchases or high-end, expensive goods. If you only sell a single product right now, you might need to expand into additional lines to upsell and cross-sell your audience.
If you sell refrigerators, your customers will likely only need one for a very long time. If you have a small target market, it’ll need to be priced high enough that you can rely on low-volume purchases.
Another factor could be your turnover cycle. If you operate a service-based business, you may need to speed up operations to make room for more clients (and more money).
How to Get Back to Profitability
Whether you want to return to profitability or haven’t ever quite made it there yet, we want to provide you with some actionable tips you can try today to move the needle:
- Financial Assessment: Dive into your financial statements to figure out your revenue streams, expenses, and profit margins, identifying areas for improvement.
- Cost Management: Scrutinize recurring expenses, eliminate redundancies, and negotiate better terms with suppliers to reduce costs.
- Revenue Streams: Diversify by exploring new revenue channels and optimizing existing ones for better profitability.
- Pricing Strategy: Review and adjust pricing models to cover costs while remaining competitive, ensuring a healthy profit margin.
- Marketing and Sales: Enhance marketing efforts to attract a broader customer base and implement sales strategies to recuperate old leads or untapped funnels.
- Operational Efficiency: Streamline processes, adopt technology solutions, and improve workflow systems to enhance productivity and reduce operational costs.
- Customer Feedback: Use customer insights to refine products or services to better meet market demands and foster customer satisfaction.
- Competitive Analysis: Stay up to date on market trends and competitor strategies to adapt and maintain a competitive edge.
- Debt Management: Strategize to reduce debt burdens by restructuring debts or negotiating better terms, alleviating financial strain.
- Sustainability: Incorporate sustainable practices that reduce costs and appeal to a growing eco-conscious customer base, fostering long-term profitability.
Keep Learning: How to Sell Your Business – 5 Tips from a Business Investor
Turn Your Business Around
Entrepreneurs make mistakes. It’s all part of the game.
Don’t beat yourself up or hang your head. Identify the mistake, implement the fix, and turn your business around.
You’ve heard it before but listen this time.
Thomas Edison failed 1,000 times before inventing the working light bulb. We’re going out on a hunch here, but it’s probably safe to assume you haven’t had 1,000 business failures. You probably haven’t even had 5.
Pick yourself up, dust off the embarrassment, and go at it again. You likely don’t need to turn your business upside down to start making a profit. You probably just need to make a few minor tweaks, twists, jerks, and voilà—you’re back on track.
You might be just making it by now, but soon you’ll be making it rain.
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This article was updated with support from Graeme Whiles.
