Barriers to Entry

Factors that can prevent or impede newcomers into a market

Barriers to entry are factors that give existing businesses a competitive advantage in any industry. These factors can be a result of market dynamics (that is, they occur naturally within the free market) or a result of government intervention. Because of these factors, new businesses find it difficult to break into an industry. Examples of barrier to entry are;

High startup or entry cost

These are expenses incurred in the process of starting a company. The exact amount it will cost depends on the type of business as well as the industry. The cost usually covers basic necessities such as equipment and supplies, insurance, licensing and permit fees, office space and other necessary infrastructures.

Government regulations

Regulations imposed in a particular industry by the government can also act as a barrier to entry. Government regulations are often imposed as a control measure to ensure that the goods or services meet a certain standard. New companies may find it difficult to meet this standard either due to the lack of resources or experience.

Customer loyalty

A strong customer loyalty in a niche market is great unless you are a new business trying to break into the market, then you have a problem. It is difficult to convert customers who do not have any reason to patronize a new brand. Customer loyalty if overlooked can be a costly mistake and many compnies have folded up as a result.

A strong brand identity

well established companies often control a large percent of the market share. Take Google for instance. For years they have remained the top search engine despite the fact that they are so many new and sometimes better search engines. But Google has a strong brand identity and being a player in the industry for so long, they have a greater advantage over startups in the industry.

Other barriers to entry are patented technologies and tax benefits. New businesses have to scale these hurdles to survive.