Getting ready to start your own food business? Awesome! You’re in the one line of business that never goes out of style. Everyone needs to eat – more than once a day – and for the entrepreneur, this is a massive opportunity.
Unfortunately, many food businesses fail within their first year of business. Many of them fail because of critical mistakes they made in the beginning.
You don’t have to do the same. Before you dive into business and begin blowing away your hard-earned cash, you want to be truly prepared for success.
In this article, I’ve captured some of the biggest reasons why new food businesses fail, and what you can do to avoid making these costly mistakes and ensure your new brand is a banging success.
Let’s dive right in!
Mistake #1: You’re Not the Right Fit For Business
The number one mistake many make is jumping into business because everyone else is doing so. If you’re not cut out for business, that would be the beginning of your failure.
A desire to make more money than in your 9 to 5 is not enough. Passion alone is not enough either. What does this mean?
Having spent the past decade in business, I’ve seen it all. So many times, I have wanted to throw in the towel thanks to the volatility of business. Business goes up, and you’re happy; then it goes down, and your mood goes with it.
As a business owner, there’ve been times when I’ve gone for months, even years, without any payment or income to support myself.
This is the life of the typical small business owner, especially one who’s just starting out.
Note that this is not to discourage you. Instead, it’s just a reminder that you must be prepared for the rollercoaster life of business before jumping in. If you’re not cut out for such a life, then the safety and security of a 9 to 5 may just be best for you.
If, however, you have a high-risk tolerance, enjoy living through the rollercoaster, and have a passion for creating things that people enjoy, you’re going to be in for a great ride. Ready to begin?
Not so fast! Before you conclude that you’re the right fit for life as a business owner, there are three questions you must ask yourself. As you consider these questions, be completely transparent about your answers, and accept them for what they are.
Question 1: Are you willing to work more than 40 hours a week?
For the typical employee, 40 – or at most 45 – hour work weeks are the norm. Work hours are work hours, and evenings after close of work, as well as entire weekends, are spent unwinding.
If you’re one who really enjoys having all of that time off, having your weekends to yourself, and aren’t willing to compromise on any of that, then a food business might not be for you.
A successful food business owner must be willing to put in the work and spend time building the engine. The initial build-up process of any business is tedious and would require that you exert yourself beyond regular hours.
Eventually, though, it pays off and the food business begins to run automatically for you in the future, allowing you take in even more hours of rest than the regular employee. But first, you must do the work and build that engine to run itself.
This was my case at the beginning. In those early years, I spent every weekend in my summertime building the business. These days, I could go days without working at all, enjoying vacations while my business automatically generates my income.
So, are you ready to work more than 40 hours a week for your future?
Question 2: Do you really enjoy serving people?
Food businesses fall firmly within the hospitality sector…
What does that mean for you and your food business?
For starters, realize that the hospitality industry is about service. Service to other people. You must derive satisfaction from serving others and watching them enjoy your food and delight in your service.
At the end of the day, you always want to remember that a food business goes beyond just the food. It’s about the experience you’re able to deliver to those who enjoy your food.
It’s about the atmosphere you can create for them as they take in your meal.
So, do you really enjoy serving people?
Question 3: Are you willing to go without pay for a while?
It often takes time to recoup your business investment. This means that you may not be getting paid for months – even years – at a time.
So, if you need that regular cash flow to sustain your livelihood and feed your family, you’d probably either need to abandon business for now, or run your business alongside a part time job in order to sustain yourself.
Now, to be clear, certain businesses make back their investments and enter into profit in really short time periods. The speed at which it happens for you, all comes down to knowing what you’re doing.
Every successful food business owner is strategic about everything from the products they choose to their numbers, margins, menu curation and presentation, etc.
You must also know your ideal customer profile, the experience you hope to provide for this customer, and how best to reach this customer through your marketing campaigns.
Without getting all of these right at the beginning, it’d take you much longer to recoup your initial investment.
Even then, getting your preparation right isn’t a guarantee of immediate success. So, you must be prepared for the possibility that you won’t be earning any healthy income for a while.
Mistake #2: You Don’t Know Your Target Customer
Identifying the ideal customer is critical to the success of any business, and is a regular part of the advice I dish out to food business owners.
Unfortunately, this is a mistake many still make.
If you don’t understand your target demographic, you may end up spending tens of thousands of dollars on marketing agencies in the hope that they’d stumble on a magic formula that’d turn your business around.
Without knowing your target customer, you’d spend many sleepless nights wondering why your marketing strategies aren’t working, and why customers aren’t coming through those doors, even if your competition seems to be thriving.
Indeed, your lack of knowledge of your target customer would prevent you from building a food brand with truly loyal followers who cannot do without your food.
Sadly, this problem is an easy one to miss. When facing problems arising from poor targeting, you could tweak everything from your pricing to your menu items and their variations, without ever solving the problem.
But it doesn’t have to be so!
Before delving into any business, be sure to identify your target demographic. Build your business around them and their needs.
Your products/services, pricing strategy, menu items, brand colors, website, language style, and marketing strategy should all revolve around that target demographic.
You might wonder, though, if narrowing down your target demographic and optimizing for them won’t shut down the rest of the market for you… Is targeting a single demographic not a bit counterintuitive?
The short answer, no!
It is indeed the opposite. When you try to sell to everyone, you fail to reach anyone. No one hears your sound because there’s a lot of different competing noises. You’re a jack of all trades who no single group can identify with.
When you successfully streamline to just one demographic, however, you’re better able to craft your message to reach them. And this is where you’d find success.
Confused on how to create a solid target avatar?
Understanding your target customer is a critical business fundamental. Messing this up will mean you’ll run the risk of creating a brand and menu that won’t appeal to the people you want it to. And that could be a costly mistake.
Because it’s like talking to your customers in a whole different language! They don’t understand you and you don’t understand them.
That’s why I created the Foodiepreneur’s Finest Mentorship Program to teach you how to properly do your target market research and other business fundamentals. That way you’ll be able to create your own target avatar that works and be confident that you’re speaking and selling your customers what they WANT and NEED.
So if you want to start a food business and start it on the right foot, so you know exactly what your customers want and appeal to them, then join me and other food entrepreneurs in the Foodiepreneur’s Finest Mentorship Program!
Mistake #3: You Do Not Understand Your Numbers
This is a very deadly mistake that plagues a surprisingly large number of businesses. If you fall into this category, you’re far from alone. But you aren’t in good company.
To frame the problem differently, if you don’t plan for profit – and optimize your numbers for profit – you can’t make any profits.
My early career was a sad tale of a similar problem: a young man who loved ice creams, saw that they sold well, dived into the market, and set prices using arbitrary prices – just because those were the prices others used.
At the end of each month, I was left with balances of $100-200 or, in some months, even negative balances.
Each time, I was left wondering why I wasn’t getting any profits despite selling my ice cream at $7 and spending only $1 on ingredients. I simply couldn’t tell where the money went because I wasn’t paying attention.
To successfully avoid making this mistake yourself, there are three key numbers you must know…
1. Average Order Value (AOV)
Your average order value is defined as “the average dollar amount spent each time a customer places an order”, which is calculated by dividing your total revenue by the total number of orders.
To understand what this means, let us assume you bake and sell cookies for $3 each. If on average you sell 2 cookies per transaction, your AOV is $6.
Now, if you’re able to bundle these cookies into batches of six and twelve, you can boost your AOV to between $18 and $36. This is a 3x – 6x increase in your AOV thanks to strategic pricing.
Why is this number important?
Increasing your average order value could lead to a massive reduction in your cost of acquiring customers, by increasing how much each customer spends on your business.
Your AOV should be an important part of your business strategy. This number helps you set goals and targets, and evaluate how those targets are working out.
In fact, understanding how your average order value works, and tweaking it correctly, is sometimes a much better growth strategy than attempting to improve your reach through expensive marketing campaigns. How so?
Imagine you want to make $1,000 in monthly revenue. Rather than attempt to bring in 150 customers, all of whom pay chump change, you could increase your average order value to $20 and target just 50 customers.
With fewer customers paying you more per transaction, you can spend more time fine-tuning the experience for these customers, and less time worrying about your next sale.
This concept of package bundling applies everywhere in the food industry.
So, take the time to understand what you sell, who your customers are, and how you can bundle what you sell together to improve your customer’s experience while getting them to pay more per order.
2. Cost of Goods Sold (COGS)
The Cost of Goods Sold (COGS) measures the average amount spent on each item you’re selling. This mostly measures the cost of ingredients (raw materials) put into the product.
Note, however, that the COGS doesn’t measure certain other operating expenses such as packaging costs, distribution costs, labor costs, etc. Despite its perceived limitations, understanding your COGS per product is key to running a profitable food business.
Without knowing your COGS, how can you make sure you’re setting the right price for your product – a price that’s both fair to the market and good enough for profits?
Unfortunately, many fail to calculate this number and end up setting their prices too low; much like myself when I just started out, they pick a random number which they believe the market would be comfortable with and run with it.
In reality, you should be setting your price to account for all the costs that go into your production process.
For example, let’s say you run an ice cream business and are selling it at $8 per pint because that seems like a very attractive price for the market.
Now, let’s go further to assume that your COGS already takes up $4 in expenses. This means you’re making profits of $4 per pint, right?
Wrong! You have yet to account for the cost of labor, rent, marketing, and any other miscellaneous expenses made during the “production” process. So, you’re left with just 50% of your selling price to account for these and generate profits.
By the time you do you finally account for every cost, you may realize that you’re losing money per pint rather than making profits.
As a rule of thumb, your labor costs should account for 25% of total expenses, rental 25%, and COGS 25%. This makes room for other minor expenses, and allows you to set a reasonable and profitable selling price.
Always note that prices are flexible, and you are the price setter as the business owner. If you’re running an ice cream business, for example, a pint of ice cream can be sold for anything between $5 and $16.
So, rather than compromise on pricing, set your prices up for profit, and properly communicate the value you provide to your customers.
Interestingly, many business owners have found that they can improve their profits by minimizing the cost of goods sold, even without increasing their customer base or increasing their prices.
One way you can minimize your COGS as a food business owner is by taking advantage of seasonal items. For instance, if mangoes are in season and can be gotten very cheaply, you could include a special menu item for mango-flavored ice cream.
Now, your ice cream is that much better, with fresh mangoes that increase its perceived value and a much-reduced COGS, which both add up to higher profits.
3. Burn Rate
The burn rate is a measure of negative cashflow. It is a rate used to describe how quickly your new business is spending (read: burning up) your original capital to finance itself before recording positive cashflow.
The burn rate is usually measured in terms of monthly expenses for your business. Essentially, it asks the question: how much are you going to be forking out if you have zero business in a month?
Let’s imagine for a second that you’ve just established your food business which runs out of a restaurant. Thanks to rent and labor, your overhead costs may be anywhere from $5,000 – $7,000 monthly. This amount becomes your monthly burn rate.
On the other hand, your burn rate would be substantially lower if you’re operating your food business out of your home.
This is what makes understanding your burn rate very vital. It enables you to plan properly to ensure your business keeps running until it gets out of the red.
Understanding your burn rate helps you stay out of bankruptcy. It keeps you in the game, allowing you to continue to build your business until it becomes profitable.
You must properly estimate your burn rate when projecting – and preparing for – your business cash flow. To do that, take into account every possible expense for the business – including rent, labor, raw materials, management costs, etc.
When projecting your burn rate, it’s also important that you make alternate plans for when you run out of cash. This forestalls you from immediate bankruptcy once your original capital runs out.
Your Plan B here could be any potential source of extra funding that is already available as a fail-safe.
If you intend asking friends or family for support, for instance, they must know what it is you’re up to, and be both ready and willing to help if needed. When the time comes for additional funding, this should come as no surprise to them.
If you plan on sourcing for grants, you should be aware that this process could take some time. So, you must begin the process in good time so that your business doesn’t pack up while you await a grant.
The bottom line? Know your numbers! This is necessary, even if you were never the biggest fan of arithmetic in school.
Despite being in business now for over a decade, numbers (profit and loss statements, balance sheets, etc.) still put me to sleep. However, I never play with these core numbers as they are the key to my business success. You shouldn’t, either!
Not a numbers person?
I wasn’t either when I first started. All the numbers and financial part was scary and confusing for me too. But I knew that if I wanted to start a successful food business, I needed to get a hang of working with them.
That’s why I created the Foodiepreneur’s Finest Mentorship Program that walks you through figuring out your most important numbers (like average order value, cost of goods sold, and more) and other core business fundamentals to build a thriving food business. There’s also a private community and bi-weekly student call that you can hop on to ask any question if you do get stuck.
Join me in the Foodiepreneur’s Finest so you can start your food business confidently and while avoiding costly mistakes.
Mistake #4: You Lack a Growth Mindset
You simply cannot succeed in business without a growth mindset.
A growth mindset is what drives you to continually seek ways to succeed regardless of the challenges or difficulties you may encounter.
For a food business owner, a growth mindset is what pushes you to constantly seek knowledge in order to further improve and finetune your business.
An important part of this mindset is asking for help when you need to. For someone looking to build a successful food business, you mustn’t be scared to learn from those ahead of you.
Ask them what they would have done in your position, what they did to get ahead, and how they managed to shortcut their chances of success.
A growth mindset would also drive you to continue to find ways to better serve your customer. This may be by offering loyalty bonuses, or may involve your learning a new technology. Whichever the case, you must seek to continually improve your service.
A growth mindset is also what pushes you to continue to learn about your customers and how to best reach them. What are the latest marketing tricks and tactics? How can you adopt them?
Speak with your community and peers, and learn from them. See what they’re doing, what strategy is working for them, and how you can apply the same.
And, never stop looking to grow!
And that’s it! The four biggest mistakes you MUST avoid when starting a food business.
As someone who has personally been in the industry for a while, and one who has consulted with others in the industry, I have seen many make a lot of these mistakes.
But you don’t have to do the same.
Be sure to carefully examine for yourself whether you’re ready to begin your food business. Are you really cut out for business? Do you know your numbers and target demographic? Do you have that all-important growth mindset?
Take note of your strengths, and be honest about your weaknesses. Once you identify a weakness, take the time to get rid of it and convert it into a strength.
To help you do just that, I’ve put together a free masterclass that discusses in more detail everything you need to know about crafting your customer demographic, understanding your numbers, and getting your marketing right. This is a must-watch for anyone looking to take off in the food industry.
Ready? Click the link below and get on your way to building the ultra-successful food business of your dreams.