There are seemingly unlimited ways a website or business can fail. Yet while venture capital can make profitability an option rather than a requirement in the short term, when it comes to long-term success, profitability is the only thing that matters in the end. With that in mind, here are three main traps and pitfalls to watch out for when looking to avoid business failure.
Choosing a Business That Isn’t Very Profitable
Limit using company capital for any investments that are not easily liquidated upon demand. Cash flow is one of the essential parts of a business; if you cannot handle it, find someone who can.
Even if your business generates millions of dollars in revenue, if your margins are too small or your costs are wildly variable, you may find it challenging to turn a profit. Examples are plentiful today in the creator space. Platforms keep launching, yet margins are narrow and most fail to be profitable for years, if ever. Beyond that, what problem is being “solved” here with 50 different platforms, that a dozen or fewer competitors aren’t solving?
Build value for your customers or clients, and don’t destroy your profit margins for the sake of competition. People are happy to pay for a premium product that isn’t fluff. If your business model isn’t profitable, it is critical to determine whether or not you’ll be profitable with scale. If not, growing your business will only accelerate your losses. The only option in that situation is to reduce costs or raise prices.
Pricing or High Costs
Numerous founders whose businesses failed blame pricing issues or high costs. It is imperative to have a pricing strategy — but more than that, your plan has to make sense.
There is a saying that you can be the cheapest or the best, but you can’t be both. The pain points of both are apparent. Charging lower prices for a similar-quality product means that your margins will be smaller. Growing profits without charging more requires reducing quality. This typically means a lesser product, unless a generational technological leap makes your alternative better or you can scale.
On the other end of the pricing spectrum are companies with wide economic moats, monopolies or first-mover advantage. In these scenarios, high prices — or even price gouging — can drive massive profits, but leaves them open to competition. Case in point: big companies such as PlayStation, Microsoft and Nintendo will often charge high prices for brand-new video gaming consoles. Making it more affordable allows the company to sell more, but they only do this after they’ve already squeezed out considerable profits and paid for their research and development. Initial high prices are for the early adopters who want the newest gadget no matter what. As time passes, others who are not in a hurry will enjoy price drops that occur over time as a console ages. Other companies also partake in this type of price cannibalism to keep competitors from attempting to join the market.
Regarding sustainability, there is a delicate balance between being priced high enough to cover costs and low enough to attract customers. Many times, low prices are what drive growth, yet those same low prices are often what makes a venture collapse.
It is widely known that outside capital fueled the now-bankrupt traffic network Reporo. Years ago, it blasted onto the scene, sponsoring every major convention. Over time, the company appeared to be overpaying for the same or similar advertising space that other advertising networks, like my own, were selling. In the end, novelty and flash can't survive an out-of-control burn rate.
Failure to Manage Cash Flow
Again, to use the high-revenue and low-margin creator platform business as an example, it becomes increasingly challenging to manage cash flow when you're running out of cash. Failure to manage cash flow will cause bills, and creators, to go unpaid or only be paid intermittently. Both are bad for business.
Many affiliate programs in adult have gone under because of unforeseen cash crunches. Insolvency for affiliate programs often happens when affiliate money is invested and lost, or spent by the founders. It is imperative to keep cash reserves. Things are always great when revenues are increasing, but crunches happen when sales slow down while payments from the boom times are still owed, and the money isn’t there. Affiliates can be unforgiving, and they love to post on forums about not being paid. Those posts endure for years even if the issue is rectified. Often these collections of negative posts cause a business to dip even further, which causes the equivalent of a run on the bank. It doesn’t end well.
The virtual wallet company ePassporte invested in the movie “Middle Men,” which flopped at the box office. Who could have known people wouldn’t want to watch a film about processing credit cards for porn? The story of what happened to ePassporte differs depending on who is telling it, but the fact remains that ePassporte lost Visa. As fear tugged at account holders, there was a run on the bank as everyone tried to get their money out. The now infamous statement that the money was “in motion” seemed to mean it was gone. There were class-action lawsuits that recovered only portions of the funds.
Avoid cash flow issues by always keeping reserves. Avoid risking large portions of capital that might be needed. Limit using company capital for any investments that are not easily liquidated upon demand. Cash flow is one of the essential parts of a business; if you cannot handle it, find someone who can. But it isn’t just your cash flow that you should be mindful of. If the companies you work with start missing payments or ask for increasing net payment terms, often 30 days or more, be very cautious about extending additional credit. Usually, this is a sign of a business going under.
Juicy Jay is the CEO and founder of the JuicyAds advertising network, as well as the founder of Broker.xxx, which helps people buy and sell adult websites and businesses. He also provides executive consulting, business strategy and marketing services at Consulting.xxx.