Barriers to Entry

April 18th, 2009 by | Print

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Entering into a new market is a walk through a veritable mine field of hidden dangers that can maim or kill a business. Performing in depth research ahead of time to get the lay of the land is the best strategy for survival. These land mines are known as barriers to entry – obstacles a company must overcome to enter (and subsequently succeed within) a market.

 

Performing research will allow a company to create a defensive strategy to avoid injury and deploy offensive tactics to hinder competitors from following. What are these barriers to entry?

 

Brand

Building a brand takes money or time (sometimes both) to establish. A brand is created through customer experience and massive marketing. Large corporations have the ability to spend big bucks to build a brand. Deep pockets buy them saturation in various mediums of media creating an overwhelming presence – and in some cases a viable argument of excellence – for brand awareness. It is important to know what brands you will be battling when entering into a new market. The quickest way to enter with a new brand is to differentiate your brand with a unique value proposition for the market.

 

Intellectual Property

Intellectual property is one of the best barriers for entry especially when protected with patents, copyrights, trademarks and servicemarks. The ability to and costs associated with creating like products that do not infringe on these protections create an excellent barrier to entry for future competitors.

 

Customer Loyalty

Customer loyalty competes for the top spot with intellectual property for effective barriers to entry. A clear understand of your customers current needs, your preparedness for servicing future needs, the excellence of the value that you deliver for the price paid and your constant dialogue with your customers are all excellent attributes to building customer loyalty. Your ability to master these qualities equates to the degree of customer loyalty that you can enjoy – effectively establishing a warning sign for all future competitors.

 

Pricing

Both low and high prices can create a barrier to entry. Companies will either deliver products at a low price to gain entry into a market or bleed out the competition. Companies that cannot produce products at a low cost or have limited cash reserves will not be able to survive within low priced markets. High prices create a barrier to entry by requiring competitors to produce products of exceedingly high value. Companies that cannot create high quality products or support the product with a variety of valuable services will die off.

 

Costs

Certain industries carry a high costs that naturally limit the number of businesses able to enter and require service providers to have ample cash or excellent open lines of credit. Areas of high costs include marketing costs for branding within a mature industry saturated by numerous service providers, costs to produce specialty products, and costs to delivery products to remote customers and large markets. The ability to negotiate better-than-market cost structures with vendors gives a company an edge to increase the barrier to entry for the competition, too.

 

Exclusive Agreements

Establishing exclusive agreements with vendors and customers are an excellent strategy for closing out the competition. Examples of exclusive agreements with vendors include exclusivity for the supply of a particular component or as mentioned above the best market pricing (usually for a specific period of time). Exclusivity with a customer may include exclusive rights to sell combined with non-compete vendor clauses with distribution partners.

 

Restrictive Policies

Although restrictive policies are not typically a factor for the solopreneur, it is still important to understand this barrier to entry and research if it applies to you. Restrictive polices include government regulations and limitations on permits within a given region or industry. Examples of restrictive policies range from the limited number of liquor licenses available within a town or city to airlines competing for a restrictive number of spots for servicing a specific airport.

 

All of these factors have an impact on the number of competitors within an industry determining whether a market will enjoy excellent completion due to a variety of vendors or create a natural monopoly where only a select few companies can enter and thrive. Research is the best defense against barriers when entering a new market while creating strategies and tactics in the planning phase establishes the best offense against future companies.

 

Your ability to understand and create barriers of entry is an essential quality for survival as a solopreneur.

 

All The Best,

Doug Dolan
The Solopreneur’s Guide

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2 Responses to “Barriers to Entry”

  1. Susan Kishner Says:

    Thanks for posting the article, was certainly a great read!

  2. Paul - Minnow Web Design Says:

    Thanks for the great article.

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