When it comes to business, not all models are created equal. Some businesses are inherently more stable than others. Before jumping into a new business, check out this list of the five riskiest business models and why they are so difficult to improve!
1. Restaurants
Restaurants historically work on thin profit margins, often around 1 percent. While a truly unique restaurant in an upscale area can produce decent profits, most restaurants are hard to differentiate and essentially compete with every other restaurant in a given area. Restaurants require an enormous initial capital investment for equipment, which can eat away money that will be needed to keep the business in the black while it builds a customer base. They also require permits and routine inspections by health officials — and most restaurants forget about a profit-boosting bar, which requires expensive permits and additional regulations. These factors are why nearly 23 percent of restaurants fail in their first year of business. While restaurant owners can use resources like BusinessInsurance.org to reduce their risk, restaurants still remain an exceptionally risky business model.
2. Clothing Stores
Customers are very particular about clothing style and fit. No two customers will view a shirt the same way, and a dress on the rack looks very different on two separate customers. Online shopping allows customers to find more styles and sizes while also competing on price — and they will deliver it right to customers to try on and return, which eliminates the local clothing store’s advantage in letting customers see what they’re buying first. This has made it difficult for small stores to survive.
3. Bookstores
Amazon completely dominates this market. They are even offering incentives for customers who walk into a local book store, scan a book’s barcode with their smartphone, and decide to purchase the book online at a lower price. It is very hard now for local bookstores to remain competitive when every book ever printed is available online for bargain prices.
4. Tax Preparation
Even something as complicated as doing taxes can now be done by computers. Services like TurboTax allow customers to do their taxes at their own pace and in the privacy of their own home — no need to take a day off work, gather up a year’s worth of receipts, and haul it into someone’s office. Most online tax preparers will even allow customers filing a 1040EZ to file for free. This has drained clients from traditional tax preparation businesses and eroded profit margins in the industry.
5. Antiques
Antique stores used to operate on asymmetrical information between owner and buyer — often the people selling antiques did not know what they were worth, which allowed antiques dealers to buy low and sell high. It is now possible to take Grandpa’s old bicycle and look up its price on eBay. With dealers having to pay higher prices to buy antiques from well-informed sellers, the profit margin on small antiques stores has been squeezed.
Tags: Antiques, Bookstores, Business Insurance, Business Model, business risks, Clothing Stores, Restaurants, Risky Business Model, Tax Preparation
