Building Barriers to Entry- How to Keep the Competition at Bay

By Business.com Editorial Staff
Business.com / Strategy / Last Modified: February 22, 2017

Competition is every businessman's nightmare. It's also the reality of almost every business, except monopolies. Traditional businesses,...

Competition is every businessman's nightmare. It's also the reality of almost every business, except monopolies. Traditional businesses, those that sell products out of brick and mortar locations -- tend to worry about competition in their immediate area that sell similar products at lower prices, of better quality, or with more refined marketing tactics. It's unavoidable in almost any industry. When you come to launch a business, you can expect others to follow suit -- dwindling your revenues, increasing your cost to compete, and minimizing your profits.

Therefore, any successful business strategy should include building "barriers." Example of barriers are marketing higher quality products, or offering products at such a low prices (through stronger relationships with suppliers, or exclusive contracts) that competitors cannot match prices and still make a profit. Here are some common barriers to entry:

Intellectual Property

Patenting a product or invention creates exclusivity. Businesses who patent their products, or even processes, have a legal barrier against entry.

Related: See More Tips and Advice for Starting a Small Business

Control of resources

If a firm controls a certain resource, natural or artificial, it can essentially be the only one to produce the end product. Relationships with suppliers, such as chip manufacturers, can allow businesses to have a dominant share in their market.

Capital

Businesses that are "capital intensive" do not invite as much competition, because of the sunk costs required for other businesses to compete. Companies that produce industrial equipment, or airline parts, would most likely have less competition than producers of textiles such as t-shirts.

Zoning

Municipalities may award exclusive contracts or permission to firms to operate within the city. They may block any further distribution of permits, and those who already have them -- are usually "grandfathered" in. Therefore, businesses that are first in a given market may benefit from zoning.

Network Effect

When a business makes a significant impression among a large group of users or customers, "word of mouth" and popularity can deter competitors from being as successful. Several Internet websites benefit from the network effect. Most have spent nothing, or a very minimal amount, on advertising, leaning heavily on the network effect to maintain a competitive advantage among new entrants.

Pricing

Many businesses price low or offer promotions, to drive competitors from a market. Pricing, even at a loss, has been used by dominant companies to maintain market dominance. However, federal antitrust regulations seek to prevent this practice, and can result in treble damages for "predatory pricing."

Customer Loyalty

Maintaining strong, enduring relationships with past and present customers creates not only ongoing business, but also forms a competitive advantage against new entrants into the market. Customer loyalty, and marketing to repeat customers, can also be cheaper than acquiring new customers.

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Regardless of the business model, these are just some examples of barriers to entry that can protect a company from immediate competition. However, no enterprise is truly immune. Therefore, proper execution to maintain these barriers, and create new barriers over time, can help to preserve or grow its share in the market. So if you're starting your own business, take a moment to ask yourself: "What are my barriers to entry?"

(Image Source: freedigitalphotos.net)

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