Three reasons why your business is unprofitable

Businessman showing empty pockets [Courtesy]

Many entrepreneurs start their small businesses with dreams of making bucket loads of money in profits. But too often, they’re hit with the realisation that it takes a while for a business to become truly profitable. And even then, the profits may be lower than you had expected.

If you gave up the comfort of a stable job to pursue entrepreneurship, failure to make profits from your business can be quite disheartening. That is why some new entrepreneurs call it quits and go back to employment.

Before you give up on your business, let’s take a look at three main reasons it might not be making money and how you can turn things around.

Your product isn’t viable

When you are starting your business, you feel excited about the products or services you will be offering your customers. But are they similarly excited?

Realising that your product isn’t viable in the market can be a harsh reality check. The problem might be that the product is too costly – in which case you should rethink your pricing strategy. However, it could also be that the customer doesn’t need or want your products or services.

Bear in mind that customers are looking for a product that meets a particular need. In other words, they’re looking for a solution to a problem that they have to make their life better in one way or the other. The value of your product or service, therefore, is not in how cool it is but how well it responds to your customers’ needs.

Solution: If pricing is the root of the problem, you can fix it by changing your prices to reflect competitors’ pricing and what the market is willing to pay. However, remember to factor in all business expenses to ensure that you make profits.

If the problem is low demand for the product, you can try sales and marketing to boost awareness with your audience. However, sometimes you have to admit when a product is just not viable. Instead of throwing good money after bad, a better option is to pivot.

A good place to start is looking at what your current audience needs. For example, if you started out selling imported women’s handbags, you might realise that they are more willing to invest in imported shoes.

Your costs are too high

Are you making plenty of sales but still not turning profits? The problem might be that your costs are too high. How much are you paying in rent, salaries, advertising, loan fees, business licences and so on? Many new entrepreneurs forget to factor in all the expenses associated with their business.

In addition, you may also be wasting money on non-essentials – which isn’t advisable for a new business. For instance, they invest in cool, expensive gadgets and new technology when the basic less-expensive ones would have been adequate.

Solution: It’s important to analyse all your business costs carefully to decide what is essential and what isn’t.  Ensure that all the costs associated with your business – whether big or small – are fully accounted for and factored in your pricing. Think beyond just the price of inventory – include transport, advertising, loan fees, business license, rent, salaries, office supplies, utilities and so on. Where can you reduce your costs or get cheaper options?

In addition, consider which costs you can cut on without compromising your business. Will hiring freelancers be cheaper than hiring full-time staff? Do you really need to invest in the latest technology? Where will your advertising money have the most impact? Try having a minimalist approach with your business – if it’s not essential, don’t spend on it.

By cutting down on your costs, you will automatically increase your profits without increasing your prices.

The competition is stiff

Did you analyse your competition before starting your business? Many new entrepreneurs make the mistake of going into a business area that has too much competition, spelling disaster for their fledgling enterprise.

It is always a good idea to analyse your competition when you want to set up your profitability objectives. In highly competitive markets and industries, the big competitors rely on pricing strategies to push out small competitors. For example, if you sell mops at Sh500, a big competitor can lower their prices for similar products to Sh400. Thanks to economies of scale, the big competitor might still make some profit with low prices.

Solution: When many new entrepreneurs find themselves in such a position, they try to also lower their prices – driving down their profit margins. The better strategy, instead, is to increase value to your customers. This might mean targeting a smaller niche that is wealthy enough to afford the higher prices and willing to invest in added value.

Before starting your business, analyse your competitors carefully? What strategies are working for them? With this information, determine your market share and estimate your profitability based on that. Determine what you need to do to attain maximum profitability in your niche and increase your market share.