Four likely causes of a less than viable market.
March 2018 Vol. 7 No. 3

There are any number of ways to go out of business. None of them are recommended, but the lack of a viable market tops the list.

Today's newsletter digs in on this topic, reviewing both likely causes and recommended solutions.
All the best,

Charlie Goodrich
Founder and Principal
Goodrich & Associates
In this issue...
If There Is No Market, There Is No Business

Yes, it really is that simple.

According to CB Insights, the number one reason early stage businesses fail is lack of market need. This one reason is cited as the cause of failure by a staggering 45% of all new businesses. (The next largest reason, running out of cash, only played a role in 29% of failures.)

My own experience with failed established companies backs this up: not having a market is also one of the largest (if not the largest) reasons for failure. Why? Several possibilities, but most are either related to the core product no longer having a market, or the development costs on new products that don't work tanking the company.

How can that be?
  • New products are created, but there is no need. As one medical start-up answered in the above study, "I realized, essentially, that we had no customers because no one was really interested in the model we were pitching. Doctors want more patients, not an efficient office."
  • Custom products are made for a particular customer and that customer does something else. This is particularly important if the customer is a large one or the product is a big part of revenue. (See my newsletter on customer concentration to better understand that risk.)
  • The product or service becomes obsolete. Think about makers of floppy disk drives, for example. They are gone, but even today, people still buy computers for which the floppy disk drive was invented.
  • The customers go away. No more horse drawn carriages so no more buggy whips are needed.
A few things to think about regarding this topic:

Make sure your product really serves a need.

Know your customer! In the above example, doctors want more patients and are willing to invest money to get them. They are not, however, interested in more efficient offices.

So ask yourself, do your customers/clients believe that your product or service solves an important problem(s)? You might think it's important, but do they? Is what you see as a problem even a problem in their eyes? If so, how do they solve or approach that problem today?

Remember that your customers or prospects are often buying more than the product or service you are pitching.

For example, a former client of mine, a very long in the tooth startup, keeps trying to land the "big customer" to demonstrate the commercial viability of their product to prospective buyers of their company. My former client's "better mousetrap" is a cool gizmo that when added to parts on a plane, provides all sorts of benefits, all of which are highly valued. Customers are absolutely interested. They bite, buy the product for a while, but never go big. That former client has had the same problem in the biotech market.

Why can't they break into something more substantial? Because just about everything in an airplane or biotech is high margin and big companies aren't going to risk the profits by relying on a company that has to raise money every year to keep going. In general, the bigger your customer and the more profitable the product/service it sells, the harder it will be to enter.

Customers may also require a particular ability to support them as part of the buy. Things like technicians in the field who can fix or maintain the product, certain levels of customer support, etc.

The startup above had problems as well with customers who wanted a formal quality assurance department, product specifications developed beforehand, and redundancy throughout the supply chain (including an alternative to my client). The point is, customers are often buying much more than the product or service explicitly being sold.

Understand the structural dynamics involved.

Some industries are structured so that some customers never actually buy your product - even though they use it. Automotive is a good example. A former bankruptcy client of mine made non-woven fabrics, the stuff used on the seats in a car or in the ceiling panel. They didn't sell to the auto manufacturers; they sold to the maker of the seats that in turn sold to the car companies.

In true commodity products, delivered cost is everything. If your cost is above the market price, there is no market, unless you intend to lose money. For example, a colleague of mine has developed an expertise running (or trying to run) coal-fired electric plants. At his current plant, the environmental issues are not the hurdle. The prior owner spent buckets of money to make the plant as clean as natural gas. 

My colleague's problem is that his plant is located smack in the middle of fracking country and, therefore, an abundant supply of very cheap natural gas. His competitor plants that use this local natural gas are selling electricity below his cost of coal! There is only a market for his electricity when the natural gas-fired power plants are at capacity and demand is high.

Remember, there are any number of ways to go out of business. None of them are recommended, but the lack of a viable market tops the list. Make sure you keep this in mind as you do your best to profit and succeed over the long run.

Oh yes, another common cause of business failures is related. The market still exists, but for the same reasons as having no market, it has shrunk so much it is now too small to support your cost structure.
Please share with your colleagues
Heard on the Street

Manufacturing in the US is dead, right? Wrong!

So argue Kevin L. Kliesen, economist with the Federal Reserve Bank of St. Louis and John A. Tatom, Fellow at Institute for Applied Economics, Johns Hopkins University, in their short article found here.

About Us

Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent liquidity problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.

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