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Barriers to Entry
With homage to Arthur Lipper, a mentor and friend
Roy A. Ackerman, Ph.D.,
E.A.
While running a medical device manufacturer (this is a vagary in our
regulatory environment; in any other country this venture would have
been a pharmaceutical operation), we routinely analyzed our
operations and updated our business plans. We had an outside Board,
who provided us with invaluable insight- and a counterbalance to our
(inherently inward bound and) parochial focus. Whenever we
considered a new option or product addition, Arthur always asked,
“What are the barriers to entry by our competitors?” That valuable
lesson (among many others provided by Arthur, Bob Boyle [a”h”], and
Bill Weissert to us) is one I want to share with you.
A barrier to
entry is an impediment to a competitor, something to make matters
difficult for it to compete against you. There are conventional
barriers to entry- and there are creative ones. Not only do barriers
to entry preclude market entry, but they provide a means to insure
that you have pricing power- the ability to raise prices without
losing your customers. The problem is that there are no absolute
barriers to entry.
When introducing a new product to market, it is critical to
determine how easy it would be for a potential competitor to arise.
The difficulty a potential competitor will have to compete with you
is known as the barrier to entry. Those barriers could be a
patented position, regulatory approvals, or large capital
investments- or combinations of them all.
In the business outlined above, we had a most unique product,
regulatory approval, and a unique distribution system. No, in the
end that did not stop potential competitors, but it sure
slowed them down. That is another key point I want to make- there
really is no absolute barrier to entry; the trick is to capitalize
on the barrier while it exists, capture as much market share (and
publicity) as you can, and hone in on customer service, so that when
you do have competitors, you are well placed for continued success.
But, what if you don’t have a product that terribly unique or
you don’t have regulatory barriers? There are many
other methods to create barriers to entry. One that most people
have come to recognize today- but may not understand its positioning
as a barrier to entry- is the “two year required contract” that cell
carriers have been imposing upon us. For you to get the cell phone
you want, you have to sign a two year contract with a given carrier-
with steep penalties should you cancel early. That is a barrier to
entry. No, it does not stop another carrier from entering the
market, but it does stop them from getting access to you and your
business.
Your eMail service provider has an innate barrier to entry, as well.
Switching eMail does not seem like a big problem-- until you do.
What happens to all those occasional friends or business associates
who don’t know you changed eMail accounts? They mail notices to
your old address; you don’t respond and they don’t know why or think
you are annoyed with them- or you miss a wonderful business
opportunity. Furthermore, moving all your contacts’ information
from one service to the next is often more than a little
complicated.
And, what do you think all those loyalty programs are? I belong to
a coffee shop’s loyalty program that lets me get one coffee free for
every eight I buy. Another one lets me get a coffee for half price
for every ten purchased. You may say that’s not a big deal- but
these loyalty programs generally work.
When you look at how the airlines are faring, you can see the
problem that develops when promises are broken. The airlines, both
because of financial problems and because they really never thought
through the promises they were making, having been taking back
benefits they promised to us in the past – and many fliers are
switching allegiances, because they feel cheated.
So, don’t think parochially. Just because you are offering a
service or a product that many other competitors provide- you need
to do it better (this part is a given) – but a loyalty program may
be just the ticket to create that barrier of entry to keep your
clientele. |
