Barriers to Entry

Barriers to entry are restrictions that prevent new competitors from quickly entering an area of business or industry. These include regulatory clearances, securing licenses, tax benefits, and customer loyalty.

 Startup companies need to contend with these different barriers, depending on their industry. Some may be caused by government intervention or even other firms that deem the new businesses a threat. These firms may be protecting the integrity of the industry, attempting to avoid products that they believe are inferior to the market, and at the same time, watching the market shares.

New business ventures have a lot to contend with before entering the market. Without sufficient research, they will have difficulty penetrating a market that already has strong and established barriers to entry. These barriers have already equipped them with years of experience and mastery of the technology. They have already selected the dominant control over the supplies and have the upper hand to the industry's advantages in that area, including the consumers' trust. 

Kinds of Barrier to Entry

There are two kinds of the barrier to entry

1. Structural or Natural Barriers to Entry

These include the ownership of the primary resources such as sugar plantations for soft drink companies or bee farms that produce beeswax, which can be used in various products.

There are also high set-up costs from advertising and marketing costs. Increased research and development costs will match the more prominent firms to compete. There are also the risks of competing with a product or service that already has strong existing community support.

2.  Strategic or Artificial Barriers to Entry 

These include the limiting of pricing, advertising, creating a loyalty of customers, and predatory pricing. Larger firms can lower their prices, causing the smaller ones to not profit, causing them to be forced out. Strong brand values are also strategic barriers; these create customer loyalty and discourage the new ones from competing. Also included in the structural barriers are patents and licenses that protect existing markets from similar products attempting to penetrate the market. Another is costs incurred by a customer when choosing other suppliers; these are referred to as switching costs and are seen as a form of exploitation from the suppliers.

Barriers to Entry as Investments

Investments can be intimidating and difficult to understand, but they can work in your favor.

Some barriers to entry happen; naturally, this means that the investments made and the industry protected its intellectual properties allowing it to be sustainable. High barriers enable companies to limit the gains of competitors, while low barriers may bring additional risks. Whether through strategic or structural barriers, new firms have to have to be prepared.

There are a few disadvantages of established barriers. New businesses might offer new and innovative contributions but will have difficulty introducing their ideas to an already existing monopoly. For its dominance to remain on top for years, it will need to continue to progress; otherwise, the barriers in place may cause a burden to the consumers when they have taken control of the entire market.

For more information, you may reach us at  info@cbi-commercial.com.