How Barriers to Entry Can Help You Succeed in Business by Monika Beck @SuccessHarbor

Photo Credit: nan palmero Flickr via Compfight cc
Photo Credit: nan palmero Flickr via Compfight cc

by Monika Beck | Featured Contributor

If you’re planning to start a new business, it’s logical to consider likely barriers and challenges you may face. These barriers may cause you concern that they could interfere with your startup. Yet, market barriers to entry also have significant benefits. These benefits arise from the involvement of investors and bank financing. To put levels of barriers of entry in perspective, consider the following. Businesses with the highest barriers to entry are telecommunications companies such as AT&T and Verizon. Retail chains such Walmart and major delivery services such as FedEx and UPS qualify with very high entry barriers as well. An example of a business with less high entry barriers is a reserve study consultant. One with low barriers to entry is a real estate agent, least appealing of the three levels to investors.

Why are high entry barriers important?

Low entry barriers make it easier to establish your start-up, but it will be in a saturated market. A lot of competition means investors are less likely to get a significant return. This means they may not be as interested in providing you with finance. A business with high entry barriers has factors which restrict the entry of competitors. Fewer people will try to overcome the barriers, resulting in fewer competitors. With higher entry barriers, a start-up will have a larger share of the market. This makes it much more appealing to investors and banks. A higher likelihood of investment gives your business the chance to open its doors. It also has the ability to grow faster. Once through the door, it will be difficult for others to follow.

Types of market barriers to entry

There are many types of barriers to entry. There are dependent on the type of business you are looking to establish. Four significant barriers to entry are access to distribution channels, regulatory restrictions, capital requirements and economies of scale.

Regulatory restrictions include patents and licenses, government regulations and laws. Obtaining adequate licensing can be expensive. A start-up also needs to be sure laws in areas like intellectual property rights are strong enough to support their business if required.

Access to distributions channels is a problem in a well-established industry. This is because larger players have a monopoly on a strong distribution network. Establishing industry connections takes time. You need to plan to find your way into an existing channel or possibly start your own.

Economies of scale is a significant consideration for a start-up. Purchasing or producing larger quantities of goods results in reduced costs per units. Unfortunately, to take advantage of this, you would need significant capital contributions.

Additional capital requirements can include financial investments in advanced technologies. They can also include large items of machinery and industry-specific infrastructure. If you need these to establish your business, capital contributions will be a significant barrier to entry.

Research and plan for success

It is important not to consider the many possible barriers to entry insurmountable. Take the time to thoroughly research the barriers and establish if you can overcome them. Formulate a business plan for investors that evaluates these in detail. You should enjoy a marketplace with fewer potential entrants, higher investment likelihood, and higher margins.

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Savvy web designer with a twist – Monika Beck with Webene – San Diego, CA.

Monika BeckMonika Beck is passionate about website design, web programming, ecommerce, and building businesses. She is a serial entrepreneur and the cofounder of Success Harbor a website dedicated to help entrepreneurs succeed. Success Harbor interviews successful entrepreneurs and publishes topics relevant to business owners and aspiring entrepreneurs. Monika started Success Harbor with her cofounder in order to ease the life of entrepreneurs through original research, tips and unique content. Monika is also cofounder of Webene, a website design and online marketing firm based in San Diego, CA. Webene specializes in mobile-friendly responsive websites built on the WordPress platform. Monika loves playing classical music on the piano.

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