It’s not easy to open a business in a competitive field. In fact, if it is too easy, you should question whether it’s worthwhile, in the first place, because you may end up in an overcrowded space.
The things that stop competitors from entering an industry are the things that let the established businesses keep their piece of the pie. Every startup should be aware that they will probably face barriers to entry, and these are 8 of them.
1. Startup Capital
You always have some startup cost, but many industries necessitate extensive capital, including, but not limited to, infrastructure, equipment, permits & licenses, or a minimum number of employees. It is important to anticipate potential additional costs to open your business, before you get started.
2. Technical Knowledge Base
Some businesses cannot easily break into an industry because of the high level of technical knowledge that it demands. Take computer manufacturing, for example, where the builders need to have an ability to engineer the product, while innovating at the same time, to stand out in a highly-competitive field.
3. Customer Cost of Switching
Some new businesses face the problem of convincing customers that it is worth the cost of moving away from their current provider. This is the reason for the fierce marketing campaigns of telecom carriers, as there is many times a cost associated with switching from one carrier to another. The new carrier must persuade the customer and provide incentives to make it worth the cost of switching.
4. Educating Your Market
Startups that offer an alternative to existing competitors, or those breaking in with a brand new idea, many times are faced with the task of educating their market about their product or service. This can take a great deal of time and money to accomplish, and it sometimes poses a very complicated barrier.
5. Access to Materials
You would think if you have a great product that is of benefit to consumers, that you could just get the materials and start mass-producing it, right? Sometimes it isn’t so simple. If established competing businesses who use the same raw materials already exist, they may have contracts with suppliers that disallows them from providing you with those materials.
6. Access to Distribution Channels
The use of main distribution channels can be a significant barrier to entry. When these channels are either exclusive or expensive, it can greatly impede newcomers to a certain industry.
Another instance where established competitors hold all the cards is when they hold the patents for a product, or even a crucial element of the product, such as a part that your product needs to operate. The incoming startup is forced to innovate by creating its own version of the product or part, thereby avoiding patent infringement and differentiating its own product from competitors.
8. Government Regulation
The government regulates many industries for a variety of reasons, which keeps the number of entering competitors down by forcing them to meet specific requirements. For example, automobile manufacturers must adhere strictly to a number of government regulations, such as fuel economy, emissions, and safety standards. This is one of many barriers for those who would enter the auto industry, which is why there are so few new competitors.