Barriers to entry: barriers to entry are obstacles that make it difficult to enter a given market. The term can refer to hindrances a firm faces in trying to enter a market or industry. It is the existence of high start-up costs or other obstacles that prevent new competitors from easily entering an industry or area of business. Barriers to entry benefit existing companies already operating in an industry because they protect an established company’s revenues and profits from being whittled away by new competitors.
Barriers to entry can exist as a result of government intervention (industry regulation, legislative limitations on new firms, special tax benefits to existing firms, etc.), or they can occur naturally within the business world. Some naturally occurring barriers to entry could be technological patents or patents on business processes, a strong brand identity, strong customer loyalty, or high customer switching costs.
Fig: Barriers to Entry features
Barriers to entry act as a deterrent against new competitors. They serve as a defensive mechanism that imposes a cost element to new entrants, which incumbents do not have to bear. Startups need to understand any barriers to entry for their business and market for two key reasons:
- Startups might seek to enter a business with high barriers to entry. Doing so would put the start-up at a significant disadvantage that is difficult to overcome.
- Startups that become market leaders must understand how to protect their position by building barriers to entry.
Barriers to entry are factors that prevent a startup from entering a particular market. 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). The intensity of competition in a certain field determines the attractiveness of a market (that is, low intensity means that the market is attractive).