This article is about barriers to entry to the market.
Successful Marketing requires firms to understand which market they are operating in, who their consumers are and where they are located, whether the market is growing or shrinking, what the business’s share of that market is and how strong the major competitors are.
What is meant by barriers to entry?
Barriers to entry to the market are obstacles that determine the easiness of entering into the particular market.
In other words, factors that make it difficult for new firms to enter the market, or prevent entering at all.
Examples of barriers to entry
- Strong competition. This barrier exists when the market is not dominated by only one monopolist or a few large businesses with oligopolistic position, but there are many firms in a perfectly competitive market. None of these firms controls a large part of a particular industry, hence none of them has dominated the whole industry with its market power.
- Economies of scale. This barrier exists when the market leader is able to lower the average cost of production thanks to having large scale of operations. The leading firm has the ability to compete on price by setting predatory pricing strategy.
- Brand loyalty. This barrier exists when customers are loyal to the existing business. Brand preferences among current customers may create a culture of distrust towards everything new, therefore the cost of switching brands is high.
- Highly-specialized machinery. This barrier exists when there are high capital requirements in order to purchase expensive technology to produce products such as advanced assembly lines. Incurring high Fixed Costs (FC) will prevent many small and medium businesses from entering the market.
- Legal barriers. This barrier includes all sorts of government regulations, the requirement to obtain various licenses and permits before the company can start trading. Other legal barriers may include existing patents and registered trademarks.
- Trade barriers. This barrier mainly relates to restraining international trade as trade barriers exist in the forms of tariffs, export and import quotas, embargoes, etc. Because of international trade restrictions, companies many not be able to neither enter the markets and trade freely nor find suitable locations abroad.
- Promotion costs. This barrier requires new firms to spend considerable amount of money on promoting its products in order to reach out to large number of customers. High promotional budgets toward advertising across mediums such as television, radio, the Internet and print will increase expenses, hence may reduce Net Profits Before Interest and TAX.
To summarize, barriers to entry are the obstacles that make it difficult for new companies to enter into a specific market. Usually, each industry will have its own particular very specific barriers to entry.
