Explain two reasons why a new business is at a greater risk of failing than an established business.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2020). The mark or mark type is shown in brackets.

1. [1] Lacks finance – liquidity/cash flow problems
2. [1] Poor planning - lack of experience - may not have a business plan - may lack management skills – lacks efficiency
3. [1] Inadequate research no effective market research - not identified customer needs - lack of demand
4. [1] Difficulties of breaking into a new market - does not have brand loyalty/there is high competition in the market
5. [1] Difficulty competing with larger established firms in the market as cannot benefit from economies of scale
6. [1] Overexpansion – tries to grow too quickly at the start – objectives too ambitious when lack of experience in running the business
7. [1] Unable to respond quickly enough to changes in the external influences – lack of financial reserves e.g. not responding to shift to online sales
8. Award a maximum of 3 additional marks for each explanation of the reason.
9. For example: Inadequate research (1) as a business might not have carried out accurate market research and felt that their products will be in demand (1) but if the products are not popular it will lead to fewer products being sold (1) resulting in lower revenue and possible business failure if costs cannot be covered (1).
10. Price - Identifies and justifies a suitable pricing method for new phone covers aimed at high income 18-25 year olds
11. Price - Price skimming as it's a new product with few competitors at the introductory stage of the product life cycle - so can charge a high price as high income customers willing to pay to own one first
12. Price - Cost-plus pricing to make sure a profit is made on the new cover
13. Price - Competitive pricing could be used as there are few competitors in this market at present
14. Price - Penetration pricing to enter a new target market of 18-25 year olds
15. Promotion - Identifies and justifies a suitable promotional method for new phone covers aimed at high income 18-25 year olds
16. Promotion - Advertise in specific magazines read by young people - niche market aimed at young people
17. Promotion - Targets young people aged 18-25 – advertising on social media may go viral and low marketing costs – CC is a small business so needs to keep down the marketing costs
18. Promotion - Suitable examples of promotional methods used for targeting high income 18-25 year olds – e.g. discounting
19. Place - Identifies and justifies a suitable distribution channel for new phone covers aimed at high income 18-25 year olds
20. Place - Sold online - easily accessible by young people aged 18-25 - used to ordering online – download an app to order directly from CC as young people may not use main retail outlets
21. Place - Shopping malls are used by target market of higher income young people
22. Place - Direct distribution increases delivery costs – but CC keeps profit margin of retail outlets
23. Conclusion Justification: If the pricing method is wrong, then the target market will not be interested in the new product even if it is promoted effectively and sold using the most suitable distribution channel for young people aged 18-25 so price is most important.
24. Conclusion Justification: Promotion is most important as if people are not aware of the covers then even if the price and place are suitable high income consumers will not buy the new covers.
25. Conclusion Justification: Place has to be suitable because even if consumers are attracted to buying the mobile phone covers with the right price and promotions to attract them, if these high income consumers cannot easily find where to buy the covers they will not sell well.