There are many statistics about the success and failure rates of new businesses. Some claim that new businesses have a failure rate of 30-90%, while the SBA reports that 50% of new businesses will make it past the 5-year mark and a third will continue to grow strong after 10 years. Whatever statistical report you want to believe, starting a new business can be very intimidating, and that is why choosing the right industry is crucial for the success of your trade.
CBInsights claims that 42% of small businesses fail because there’s no market for their products and services. This only proves that investing in the right idea will decrease your chances of being included in the feared 42% failure rate.
With thousands of small businesses sprouting like mushrooms in the wild, the competition is stiff. While of course, it’s important to choose an industry that you are passionate about, whether you’re planning to start a small shop or having doubts entering the market, keep in mind that careful industry selection is the key towards success.
Consider Barriers to Entry
Barriers in the industry are like a double-edged sword. They can be both favorable and unfavorable for your business depending on the consequences. Barriers to entry can make it easy or difficult for you to flourish and prosper in the market.
If you want an industry where requirements are lenient and starting up is pretty easy, consider businesses with few barriers to entry such as online selling, food carts, retail goods and general merchandise. Although, be aware that businesses with few barriers to entry invite tons of competition and put a lot of pressure on you to stand out and make a difference.
Trades with high barriers to entry, on the other hand, like healthcare, automobile, insurance, restaurants, professional services, etc., are more difficult to access due to their stringent requirements. While they require various degrees, permits, insurance policies, safety certifications, and great industry experience, higher capital cost and longer time for investment recovery are the tradeoffs of having less competition. Some things to remember when making this decision include:
- Always study the industry barriers related to your business and create a plan to overcome these deterrents.
- A new business entering the market should bring a different type of product to establish uniqueness.
- Review the distribution channel and access to suppliers, and make sure that they are not monopolized by big players.
Fragmentation Can Create Opportunity
When an industry is fragmented, it means that it is made up of smaller businesses with no dominant players to control the majority of the consumers. Even though highly fragmented industries are packed with smaller players, they are easier to access and the public has not given its loyalty to any one business. Fragmented industry, when penetrated, could lead to great success given the diverse portfolio of smaller businesses.
Most of the time, fragmentation leads to localized businesses in multiple locations. Marketing is focused towards a geographic location or to a certain group of consumers depending on your products and services. While fragmentation can lead to great opportunities, there are certain things you need to secure success. Some of these include:
- Use the advantage of lower marketing expenses to establish a position in the fragmented industry. Your marketing efforts should target locals and word-of-mouth as a strong option.
- Work your budget and keep your focus small rather than big. You don’t need to make a big entry to start competing with other businesses. Make a loyal following by offering great products and quality services.
- Differentiate your business from others, as uniqueness attracts leads and customers.
Recent Changes in Law and Expected Changes
While starting up your very own business is deemed to be difficult, so as to follow certain rules and regulations mandated by the government. Legislative rules can have a great impact on your business. They can open opportunities for growth, but they can equally shut down your small company in one single change of local law. Those planning to start a business should keep an eye on new federal regulations, current changes in the legislation and political shifts that will affect future trends. Consider also insurance requirements in your state you’re operating like General Liability or Workers Compensation.
For example, the increasing sales of vape products and flourishing support from the community have been affected by recent regulations pertaining to e-cigarettes as a tobacco product. Even if your industry is considered to be booming, if not properly addressed, laws and regulations could shut down your business, so keeping up and following changes is considered vital. Some key points to watch legally in business include:
- Watch out for government regulations. They have a huge impact on small businesses and potentially to your chosen industry.
- Keep yourself informed regarding minimum state wages, insurance policies required by the government and licensing rules.
- New laws may open opportunities, so be quick to capitalize before others.
Tax Breaks and Government Incentives Might Make the Difference
To encourage industry growth and increase local employment and active economic trade, many states and communities provide incentives to new and aspiring business owners. Most of the time, these incentives come in various forms such as tax abatements, tax revenue sharing, financial grants, infrastructure assistance, low-interest financing, tax credits and other monetary or non-monetary aids.
Just imagine the annual savings you will potentially make if the government offers tax breaks for your chosen industry. These savings are useful for lowering operational costs or to support the growth of your business. There are many reasons why government offer assistance for new businesses, and the factors you need to watch out for are as follows but not limited to:
- Economic development zones often receive incentives to boost growth rate in the area.
- There are specific incentives meant for specialized industries, like the Stimulus Bill of 2009 tax break for the clean-technology industry.
- New industries that are useful and advantageous to the community frequently receive encouragement from the local government thru special programs and tax incentives.
Availability of Investment Capital
Small businesses that remain stagnant are usually caused by a lack of financial capital to facilitate growth. Unless you have unlimited resources and overflowing fund availability, if you have big dreams for your small business, you will need the help of investors. Consider what attracts capitalists and determine their needs as well as wants, and check if the industry your eyeing for appeals to investors.
Industries with big potential and those that are engaging in the market are the usual ones to get financial aid from leading investors. Small businesses that are slowly disrupting the traditional force and getting a cult following are a growing haven for bigtime capitalists. Investment capitals are given to desirable industries, and for investors, there are certain indicators to look for in a business. Some of these include:
- They desire for an experienced entrepreneur who has been seasoned and strengthen by the trade.
- They want a team with passion, tenacity, flexibility, commitment, coachable and knowledgeable drive.
- They want to know ifs your business model is profitable, repeatable, expandable, defensible or predictable.
- Investors put a huge importance on customers, so they need to know that your products or services entice the public.