Be Wary of Fad Businesses

Time and again, business gurus have advised newbie entrepreneurs not to start fad businesses. A fad business is one that lasts only for a very short time. Generally, the period of its existence is from a few months to a few years at most. Unfortunately, just looking around will tell you that many fail to heed this simple and logical advise. Fad businesses are everywhere, and most of them will likely close before five years are up.

At first, I thought that only the ignorant would violate the advice against fad businesses. But then, decades of observation have made it clear that even highly intelligent people often commit this blunder. The problem is that fad businesses may look like an ideal business. To further complicate matters, a seemingly faddish business may turn out to be the wave of the future!

How do you differentiate a fad from a trend? Fad businesses have many desirable characteristics that make them look ideal. While it is sometimes impossible to tell for sure, there are still plenty of tell-tale signs that warn you of a fad:

• The type of business has been in operation for only a few months or years. Unless the business is based on a true innovation like a patented invention, its chances of success are much better if it has been going strong for at least several years. However, you cannot rely on this factor alone; otherwise, there would be no new businesses.

• There is no demographic trend or other fundamental basis for the demand. One of the strongest indicators that the business is just a fad is if there is no underlying reason for the demand to be sustained. The difficulty here is while there may be a need, it is far from certain that your particular solution is what the market will opt to patronize. Just because people have a growing need for food does not mean that they would prefer your type of food offering. In cases like this, you should be more specific in your analysis.

• Based on alternative science. In all fairness to this type of business, a lot of what are now established science were once derided as speculative or even fraudulent. The risk is that if it does not work, then there will likely be a collapse in demand sooner or later. However, sometimes the alternative science becomes the established science and the lucky pioneers reap enormous benefits. If you are the type that likes to take huge risks for equally fabulous payoffs, then at least be aware of the history of such ventures so that you can make an informed decision. Conduct careful research on the credibility of the promoters and the soundness of the science to minimize the chances of being taken for a ride.

• Reliance on the good fortune of another. It is common to know or hear of a friend who was able to recover his investment in the business in just a few months. This is further made more enticing if the lucky businessman, who manage to earn large amounts of profits, is deemed less capable. People would reason that if an intellectually challenged individual can be so successful in that particular business, then they should be able to do better. Unfortunately, you may not be as lucky as your friend.

• Copy cats are sprouting everywhere. Joining the bandwagon is rarely good business. Even the finest business opportunity may turn into a losing proposition if there are too many competitors. You may think that it will just be in the short term, as the weaker companies will soon be weeded out and the market will eventually normalize. But there are two problems with this scenario: First is that there may be many more new companies that will replace those leaving; and second, the market disruption caused by the abundance of competitors may cause your company to close first. At the very least, profits will be affected for quite some time especially if desperate companies choose to engage in a price war. The cutthroat competition that will surely arise once there is a surplus of companies supplying the same product or service will almost certainly lead to the closure of most of them.

At the beginning of each business, the owners have high hopes of making a long lasting and highly profitable enterprise. Usually, emotions trump reason and caution is thrown to the winds in assessing the long term viability of the venture. In the end, most learn the bitter lesson that fads rarely make a good business.

*Originally published by the Manila Bulletin. BB1, Wednesday, December 26, 2012. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.

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