These are one-time costs the buyer faces when switching an existing supplier’s product to a new entrant (for example, employee retraining, new equipment, technical support). Startups may get around capital requirements by outsourcing parts of the operation to companies that can leverage existing investments. These are the financial resources required for infrastructure, machinery, R&D and advertising. Startups must find an effective positioning, which often requires marketing resources beyond their means. Startups may bring a different product to market, but its benefits must be clearly communicated to the target customer. This forces entrants to spend heavily to overcome these loyalties. Incumbents have brand identification and customer loyalties. These force the entrant to either come in at a large scale (risking strong reaction from incumbents) or a small scale (forcing a cost disadvantage). These are declines in the unit costs of a product as the absolute volume per period increases. There are seven sources of barriers to entry: Economies of scale Sources of barriers to entry into a market
Startups that become market leaders must understand how to protect their position by building barriers to entry.Doing so would put the startup at a significant disadvantage that is difficult to overcome. Startups might seek to enter a business with high barriers to entry.Startups need to understand any barriers to entry for their business and market for two key reasons: They serve as a defensive mechanism that imposes a cost element to new entrants, which incumbents do not have to bear. The intensity of competition in a certain field determines the attractiveness of a market (that is, low intensity means that the market is attractive).įactors involved as barriers to entry may be either innocent (for example, the dominating company’s absolute cost advantage) or deliberate (for example, high spending on advertising by incumbents makes it very expensive for new firms to enter the market).īarriers to entry act as a deterrent against new competitors.
As a whole, they comprise one of the five forces that determine the intensity of competition in an industry (the others are industry rivalry, the bargaining power of buyers, the bargaining power of suppliers and the threat of substitutes). Researching a market? Our free online course Introduction to Market Sizing offers a practical 30-minute primer on market research and calculating market size.īarriers to entry are factors that prevent a startup from entering a particular market.
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