Why is it difficult to start a business?

Most new businesses fail. The failure is due to various reasons like lack of product/service quality, lack of customer adoption, etc. But the biggest reason is often overlooked. It is the prohibitive cost of marketing.

A new business has to market its product/service. Marketing generates demand for a product/service. It is an inescapable part of doing business. Even the best products need marketing. Marketing has two parts – 1) Letting people know about a product/service (entering the market) 2) Convincing people to buy. Entering the market is essentially getting the attention of people (e.g., the best location for a new restaurant is near a popular restaurant). Getting people’s attention is expensive. The high cost is due to incumbent businesses. Incumbent businesses spend money from their profits to occupy space in the attention market. Their competition with each other increases the price of attention. For example, real estate costs increase with the increase in the popularity of a shopping district. Keyword prices of a category in search engines increase with the increase in online sales of that category. Most new entrepreneurs can’t afford the high price for attention, especially the ones switching from a job. It also costs money to convince people to buy a new business’s product/service. People are skeptical of new businesses (for good reason). New businesses have to spend additional money on advertising to overcome this skepticism. The total cost of marketing (attention and advertising) is prohibitive for most new businesses. Entrepreneurs underestimate this cost when starting a business. Consequently, these businesses fail.

Some entrepreneurs try to reduce marketing costs by entering less competitive markets. But this is not a good strategy as less competitive markets won’t have enough demand to make a new business profitable. For example, starting a restaurant away from populated areas won’t get enough customers to make a profit. Starting an ecommerce business without spending money on search engines won’t get enough website visitors to make a profit. Some entrepreneurs try to reduce marketing costs by filling “gaps” in the market where incumbents are not present. This strategy won’t work as it only lowers advertising costs. The price of attention will still be high. Some entrepreneurs expect their products to go viral. They want to be the next Google or Facebook. But virality is always an accident. New businesses counting on an accident for marketing are set-up to fail.

The prohibitive cost of marketing doesn’t mean starting a business is impossible. It is still possible if an entrepreneur has grit. A gritty entrepreneur can generate demand through old-fashioned “sales”. Sales is a form of marketing that requires little or no money. It is just talking to people one-on-one and convincing them to buy. For example, an entrepreneur selling soap can stand outside a famous brand’s store and talk to customers all day. A few will buy, and word will slowly spread. But most new entrepreneurs won’t have the grit to do this. Social media has made sales easier, but it still requires grit to wait patiently for success.