What Are the Types of Entry Barriers?

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Creating legal and ethical barriers to entry is a tried-and-true marketing strategy for keeping market share. Unlike illegal trade practices such as predatory pricing or collusion, barriers to entry rely on your business savvy to make it more difficult for competitors to start selling in your space. Understanding basic entry barriers will help you take a proactive and legal approach to managing your competition.

Price Barriers

Sale price is a common entry barrier. If your business has high enough sales that you can make your desired gross profits on volume, rather than margins, keeping your prices low makes it difficult for newcomers to enter the market. Not only will they not have the economies of scale you enjoy from your large sales volumes, but newcomers often must shrink their margins by spending more on marketing to introduce their products. Be wary of predatory pricing, which is the practice of selling below your cost specifically to drive a competitor out of business and then raising your prices once consumers have little or no access to competition.

Access to Customers

One way to make it difficult for others to compete with you is to reduce their access to potential customers. You can do this by negotiating exclusive agreements with retailers, wholesalers, trade and professional associations and other groups. For example, if you sell plumbing products, you might negotiate to become the official supplier of your state’s or industry’s plumbing trade association. You will have the endorsement of the association, be able to place ads in its magazine and have the only access to its mailing list. Negotiating to be the only business of your type in a popular strip mall, on a public beach or at another destination location can limit your competition’s market penetration, depending on how many other options it has. If you’re entering a marketplace, make sure your competition hasn’t limited your access to your target customer.

Broad Patents

When you apply for patents, try to make them broad enough that you limit other businesses from making products similar to yours. When Prince introduced its oversize tennis racket in the 1970s, the patent was so broad that other manufacturers had to pay Prince royalties to make larger rackets and remain competitive. If you aren’t interested in earning royalties from competitors, you can simply refuse to share your patent or file a lawsuit that might be too costly for a new company. Even a temporary injunction from making and selling a product can shutter a new company.

Consumer Preferences

Consumers are often reluctant to change favorite products unless a competitor can demonstrate a significant difference or savings. Think of how often or likely you are to change toothpaste, soda or shaving cream. When the use of a product or service requires the user to embark on a learning process, this makes it even more difficult for new competitors to try to persuade consumers to try their product. Companies in this situation enhance their barriers to entry by offering free training, customer support and upgrades. This is often true of software companies.

Business Advantages

Some products require very large amounts of capital to start production up. This in itself can act as a barrier, keeping out many companies that do not have access to ready investment cash. Some products and services, as well as customers, fall under many government regulatory restrictions and guidelines, which could preclude many competitors from jumping on the bandwagon. For example, a rust-retardant coating manufacturer spent two years lobbying and completing paperwork to meet stringent regulatory guidelines before it was able to service military customers..