When you start a business, you may have to face some “barriers to entry.”
What are “barriers to entry”?
These are in-built barriers existing in some industries and market sectors that face newcomers, making it difficult for them to start a business in that industry.
It is important as a startup to recognise and identify barriers to entry, and even more important to look at ways you can get around them – or your business may be stillborn. Let’s first look at what they are.
There are 7 main sources of barriers to entry:-
- Economies of scale;
- Product differentiation;
- Capital requirements;
- Switching costs;
- Established distribution channels;
- Cost disadvantages; and
- Legislation and government policy.
Watch this video and then make sure you get the free report on “Getting Around Barriers To Entry.”
So let’s reiterate for a moment.
Barriers to entry are the in-built barriers that some industries or market sectors face. There are 7 sources:
- Some industries have economies of scale as a barrier for new entrants. An example would be an industry where in order to make a profit (by reducing costs or selling at a low price) you need to produce your product or service at a massive scale. This means that new entrants may have to start with much more investment than they could afford.
- In many markets, your competitors may have been operating for some time and have carved out loyal customers and a name for the quality of their product or service, or they may even hold patents. Even more simply, there may be so many competitors that it becomes hard for a new entrant to stand out. Hence product differentiation becomes a barrier to entry.
- In other industries, you may not be able to startup unless you had all the right equipment, or bought all the right systems from the very beginning. If you were to startup as a motor mechanic, you would need large enough premises, a lot of equipment, and heavy lifting gear – this may be a capital requirement you struggle to fund.
- Another barrier might be switching costs, where it costs your customer to switch from a competitor to yourself. As a new startup, you would be trying to find customers who already buy from someone else – if they had to re-tool or re-train in order to use your product, if they had to re-badge or change they own systems to use your service, it may cost them too much to make the decision to switch to you.
- In other instances, established distribution channels may be a barrier to your entry into the market. Perhaps you wish to import a product from an overseas manufacturer – but they have already signed up a distributor for your region? Or in order to get your product out to customers you may need a freight service – but due to the competition all the freight services are operating at capacity ion your area and they can’t take on your new business?
- The sixth barrier to entry are other cost disadvantages that older incumbent competitors already have that a new startup would find hard to replicate. There may be a major piece of equipment they bought years ago when it was cheap but has not doubled in price. It may be something as simple as the market requires a steep and long learning curve for entrants to climb – and older incumbents have already passed it.
- Finally, there is legislation, regulation, and government policy. So, you want to be a doctor? Study for a dozen years, then we’ll talk. Real Estate agents can’t open a business unless they take exams and are registered.
Barriers to entry do not necessarily stop you starting a business – but it is important to see what they are before you start, rather than invest time and money and then find that you get shut down.
Equally, it is important to consider how you can get around barriers to entry.
Economy of scale is a barrier when you want to start a home-wares retail store? Go online and negotiate with a large supplier to supply on demand.
Starting up your own accounting practice but there’s thousands of accountants out there? Product differentiate by nicheing down on your target market and provide specialist services.
Finally, I have an online course called How To Start Your Business that runs you through all the steps from scratch to opening your doors – get it by going to teikoh.com and clicking on the Products tab.