What Thing is Easy to Enter and Difficult to Get Out

Barriers to entering an industry

Launching a business is a process fraught with hurdles. Many innovations never hit the market at all, due to what economists call "barriers to entry" – obstacles that prevent new competitors from entering an industry, thus cornering the market for existing businesses (think high start-up costs). Depending on the industry, emerging businesses may face obstacles that are relatively straightforward to overcome (low barriers to entry), those that are impossible to overcome without extensive resources (high barriers to entry) – or both.

It's easy to see how, in searching for answers to the question of what are barriers to entry, many business owners understandably come to believe that they must achieve perfection (i.e. complete funding, a fully-staffed team and perfect economic conditions) in order to compete. Although ideal conditions make entering an industry easier, it is not conditions or circumstances that ultimately create market entry barriers. It's your mindset , and the biggest barriers to entry stem from your own fears.

By working diligently to refine your business vision and the passions that inspire you , you'll discover a sense of certainty that will propel you past any barriers to entering an industry you may encounter.

What are barriers to entry?

The barriers to entry definition, as defined by Investopedia, is the economic term describing the existence of high start-up costs or other obstacles that can prevent new competitors from easily entering an area of business or industry. They benefit existing firms due to the fact they protect their profits and revenues.

From an economist's standpoint, both low and high barriers to entry fall into three primary categories: Natural barriers (e.g. the cost of drilling a new oil well), policy-based barriers (e.g. regulations and licensure requirements) and market-based barriers (i.e. competition from other firms in the same industry). Common barriers to entry include the struggle to accumulate start-up capital, existing patents that limit innovation by would-be competitors and cost-prohibitive regulatory clearance requirements. There are also industry-specific barriers to entering an industry. Existing businesses also have the advantage of experience, which means they have a leg up on brand identity and customer loyalty within their target market.

High barriers to entry

In discussing how to overcome market entry barriers, it is also important to remember that, ostensibly, many market barriers are put in place to protect the industry's integrity by preventing the entry of subpar products into the marketplace. High barriers to entry provide a particularly potent measure of protection for existing firms, since high barriers make it exceedingly difficult for competitors to enter the industry. (This is true whether the barrier is natural (e.g. access to medicinal ingredients), policy-based (e.g. pharmaceutical regulations) or market-based (e.g. a lack of competition).

In discussing how to overcome market entry barriers, it is also important to remember that, ostensibly, many market barriers are put in place to protect the industry's integrity by preventing the entry of subpar products into the marketplace. High barriers to entry provide a particularly potent measure of protection for existing firms, since high barriers make it exceedingly difficult for competitors to enter the industry. (This is true whether the barrier is natural (e.g. access to medicinal ingredients), policy-based (e.g. pharmaceutical regulations) or market-based (e.g. a lack of competition).

Monopolies and oligopolies are examples of high barriers to entry. A monopoly is a single firm that produces goods or services with no close substitute, such as a cable company that is the only service provider for a city. An oligopoly is a market with a small number of related large firms that produce similar but slightly different products. Both of these can result in a market that is incredibly difficult for a newcomer to gain a customer base, especially if they do not have a large operating or marketing budget or do not have something that makes them talkably different from their competitors.

The pharmaceutical industry is a prime case study in high barriers to entry protecting an industry posing potentially wide-ranging risks to public health. What are barriers to entry for an industry as powerful as Big Pharma? In the US, federal law mandates that in order to manufacture and market a pharmaceutical drug domestically, the manufacturer must first obtain authorization from the Federal Drug Administration (FDA). The average wait time for obtaining FDA clearance for drug manufacture is a whopping 17 months. Within this timeframe, the review process entails rounds of reviews, and just 7% and 34% of applications typically pass in the first and second rounds, respectively. Even if a drug passes the review process, it must still pass clinical trials, which cost up to $100 million per trial and have a mere one-in-ten chance of obtaining FDA approval. Even after passing clinical trials, it can still take the FDA up to 10 years to approve a drug for consumption.

Drug manufacturers with existing products on the market can take the fast track, replicating and patenting existing FDA-approved products to retain a monopoly. As a result, the average cost of launching a new pharmaceutical drug in 2012 was reportedly between $1.3 and $4 billion, with a ceiling of as much as $12 billion .

Low barriers to entry

Unlike high barriers to entry, low barriers do not typically entail excessive costs or regulations implemented to protect an industry. Low barriers to entry are hurdles common to almost any enterprise, like the overhead costs of starting a brick-and-mortar retail store or the fixed costs of running an e-commerce business. (This is true whether the barrier to entry is natural (e.g. access to raw materials), policy-based (e.g. commercial regulations) or market-based (e.g. healthy competition in a balanced market).) Although it is vital to craft your business map , marketing strategy and operations to overcome low barriers to entry, these types of obstacles do not present the burden of high barriers to entry.

Examples of low barriers to entry include establishing a brand in a small marketplace that does not have a lot of competition and the need to have buyers switch to a new brand that does not involve a lot of work or hassle. For example, a high barrier to entry would be starting a new cellular phone company where new customers would need to terminate an existing contract, pay fees and get a new number to switch carriers. A low barrier of entry would be starting a new workout clothing store where switching brands would be as simple as a customer walking in and making a purchase.

How to use high barriers to entry to your advantage

The pharmaceutical industry's market entry barriers present a clear and present obstacle to would-be manufacturers of new drugs. Yet even if you're starting a small, local business with no ties to Big Pharma, you'll need to overcome your own obstacles.

How must businesses approach and overcome barriers to entry? Small Business BC reports that, although overcoming barriers to entry is a challenge, those same barriers can actually help your business. What's the trick? Seeing the equation from an investor's perspective and viewing it as an opportunity rather than an obstacle .

Rather than speculating about what are barriers to entry for a company, an investor asks another question: How do these barriers increase the business' appeal? Enter the beauty of high barriers to entry – high "ticket prices" make it difficult for competitors to even approach the market, which means that industry profits go to existing companies. When an emerging business is able to overcome significant obstacles to entering a market, it demonstrates the potential for a high return on investment, which endears the business to investors.

1. Leverage an existing brand

To overcome high barriers of entry, you often need to look at ways you can leverage existing brands to enter a new market. This could mean developing a strategic partnership or even acquiring another business that is already well-established in the market.

2. Out-innovate the competition

The needs of consumers are constantly changing, and if your business concentrates on constant, strategic innovation , you can beat out competition that has become stagnant or has not developed new technology.

3. Use a disruptive pricing model

To be a disruptor in an industry with high barriers to entry, you need to do something different. If you're entering a market where all your competitors have one type of pricing model – say, long-term membership – consider using something different like freemium subscriptions or one-time payments. This can be enough to set you apart and overcome the barrier.

4. Plan for the long-term

Some businesses who enter marketplaces with high barriers of entry must simply accept that they are in it for the long haul and that short-term losses are necessary to realize long-term gains. Though this strategy takes deep pockets, it can pay off in the long run.

How to use low barriers to entry to your advantage

Using low barrier to entry to your advantage is quite easy, as there will be numerous competitors coming into the marketplace with low budgets and no business plan due to low start-up costs. To compete against them, you need to have your ducks in a row and a massive action plan for making your endeavor a success. To beat out others similar businesses taking advantage of low barriers to entry in your industry, you need a strategy that prioritizes your own business vision, backed by rock-solid advertising, marketing, accounting and customer-retention practices.

1. Advertising and marketing

Your well-established competition likely has the financial resources to swamp the market with advertising and drown out new entrants to the market. To combat this, carefully craft your marketing strategies so that you successfully reach your target market.

2. Economies of scale

Unlike startups, established businesses enjoy "economies of scale" – cost structures that benefit large, established firms in a market. As a result, established firms are likely to have competitive access to materials or resources that streamline their production processes. Careful financial planning is your best defense against these types of barriers to entry.

3. Pricing

It's common for new businesses to under-price their products in an effort to eclipse the competition. This approach can actually backfire if the price attracts what economists call "insensitive customers" – customers who do not respond to price incentives. Cigarette smokers are a clear example, since they do not generally respond to cigarette price increases by reducing their cigarette consumption.

If you attract customers unswayed by your pricing, the demand for your product cannot be predicted and you'll be unable to steer demand through strategic pricing. To counteract this effect, carefully consider who your market is as you create your pricing strategy.

4. Customer loyalty

Customer engagement and retention is your point of strongest leverage . If you don't have a plan for recruiting loyal customers, finding answers to the question of what are barriers to entry will not keep you afloat. Unlike economic forces, which are largely beyond our control, customer relationships are one of the most malleable factors of running a successful business. Loyal customers are your bridge over barriers to entry, so take strategic action to create raving fans .

Overcome your fears to overcome market entry barriers

As a small business owner working to overcome barriers to entering an industry, it is essential to remember that high or low barriers to entry are not necessarily a bad omen. Don't let your fear of failure stop you. When you use tips to grow your business like utilizing a business map, determining the business you're really in and concentrating on your origin story, you can turn potential roadblocks into possibilities.

Though opting to avoid barriers to entry by searching out a new, untapped market may be tempting, this isn't always the best plan of action. It's understandable to think that a lack of competition would allow you to secure an uncontested monopoly, but if there is not an established market for your product, there may be a lack of demand. Working to overcome market entry barriers may actually be your path of least resistance. Rise to the challenge and learn to empower yourself for success. Take action today to overcome barriers to entry with Tony Robbins' 7 Forces of Business Mastery , where you'll gain the skills you need to optimize your business, hone your competitive advantage and create raving fans for life.

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Source: https://www.tonyrobbins.com/business/barriers-to-entry/

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