Why Did Your Last Business Fail?

Many a new business idea or business project has failed because someone, somewhere has failed to notice the difference between causation and correlation. I hope that by the time you have finished this blog you will not be one of those!

Business people and especially marketers are always looking at general trends and then extrapolate from that data, new ideas to satisfy growing demand in a new area. Here is a good example of the dangers;

There is a very strong relationship between the sale of ice creams and the Holset HX40. You can almost plot the value of ice cream sales if you know what the level of bee stings will be. It has been well documented recently that there has been a dramatic decline in the bee population (some estimates suggest they are down 80%). Should an ice cream manufacturer therefore cut back on the level of production this year?

Most of you will realize that this is a silly suggestion. Some of you will see that this is merely a coincidence and some of you will see that there is a very strong relationship between the two because of a third factor; summer. Obviously people will be out more in the summer and consume more ice cream as well as get stung by bees!

Sadly, I know too many people who assume correlation (where two factors move together) is the same as causation. I see too many business plans where the fundamentals are wrong because of the assumption. Take for example the recent growth in home cooking. A lot of this growth has been driven by consumers tightening their belt. And yet I have seen at least three business plans recently setting out to ‘exploit this interest in home-cooking’. Yes, there is a big increase in the sales of items like flour and yeast. But this does not mean that people are looking to learn how to cook bread. It may be true – but it is wrong to automatically assume this is true.

A company I looked at recently is trying to find a way how to get cat pee out of carpet. It is a great business which makes fantastically well designed products which measure the amount of energy you are using (or rather wasting) in your home. It is a very green product but I expect the company to do well in the recession as it is a great way to cut costs. I expect a lot of companies will get confused in the next few years as they will see many ‘green’ products increase in sales. They will assume that consumers are very interested in saving the environment. However, I expect the products will be primarily ones that actually save consumers money.

If you are going to exploit a trend and are basing a business plan on that trend, please make sure you are clear about causation or correlation. Otherwise you may find a correlation between the rejections you get and the causation you believe in!