If you’re building an online business, there's an important economic concept called barrier to entry that you need to understand. In this post, we'll talk about how barriers to entry can protect your business.
“Barriers to entry” sounds like a complicated term, but it simply refers to the various challenges that newcomers experience when they’re trying to enter a new market. If you’re building an online business, this is an important economic concept that you need to understand, so let’s dive in.
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Barriers To Entry Protect Existing Businesses
A barrier to entry is any factor that would prevent or make it harder for a newcomer to enter a market and start competing. Barriers to entry protect existing businesses from new competition because it limits the number of people competing in a market.
Now without getting too technical, when you have a limited set of competitors, that tends to lead to a more monopolistic market. That’s better for you as a business owner because have the option to charge higher prices.
On the other hand, in a completely competitive market, prices get pressed down, so you can’t make as much profit.
High Barriers to Entry = Higher Prices and Profits
Here’s the important thing to understand: when the barriers to entry in a market are high, you’ll tend to have higher prices and higher profits.
In other words, because other people can’t easily enter the market because of those barriers, you’ll be able to make more money since you’re an existing business in that space.
On the other hand, where barriers to entry are low, you won’t have high profit margins. That means you’ll have to bring your prices down because there’s more competition.
Examples of Barriers to Entry
When you look at traditional barriers to entry, there are several common ones.
Regulatory barriers to entry occur where only a few people or businesses are allowed to compete.
If you’re a doctor, a lawyer, or in regulated professions or industries, there are regulatory barriers to entry. Also, if you have a patent that protects a particular product or service, that would protect you from the competition.
High Startup Costs
Some of the more common barriers are those where you have high startup costs. If someone’s going to have to invest a lot of money to start their business before they can start recouping it, that’s a barrier to entry.
Another example is switching costs. If it would cost existing users a lot of time or money to switch to a new company or a new service provider, that’s a high switching cost, and it creates a barrier to entry.
For example, in the banking industry, if you have automated payments set up, then moving your primary bank account is a royal pain. That’s why once a bank gets you, the chances that you’ll move aren’t high. This is an example of a high switching cost that doesn’t cost actual money but requires a lot of time and effort.
Technology requirements are another barrier to entry. For the most part, in the online business space, this barrier has become very low.
Now tech used to be a bigger deal. When I started my law firm back in 2014, building a website was way harder than it is today. And before the days of the all-in-one systems that make it easy to build funnels, sales pages, shopping carts, courses, memberships, and all those things, you had high-tech hurdles. That led to high startup costs because you would have to pay someone to develop that for you (or you had to have that expertise). So that would prevent people from doing it.
Removing Barriers to Entry Means Losing Your Protection
In some ways, the things that make it easier for you to build your business today also mean it’s easier for competitors to come in and build a business as well. So, removing the barriers to entry for you means that you’re losing the protection that you might otherwise have had.
Now there are exceptions. If you’re a service provider and had a client who wanted to switch to a different service provider, the fact that you know this business well and have created a collection of assets for it make this a more costly move.
Create Barriers to Entry In Your Business
You need barriers to entry in your business to help you protect it. Let’s look at some of the ways you can create these in your business.
One thing that is a barrier to entry or can be a barrier to entry is customer loyalty. You can work toward building up a high level of customer loyalty where your customers simply say, “I know that Bobby is going to take care of me, so I’m willing to pay a premium. I’m not going to go to someone else who’s cheaper.”
Potential competitors would look at this scenario and say, “Hey, I’m not going to be able to come in and take any of Bobby’s existing customers.”
You can also create barriers to entry via technology. I have concrete examples of how I’m creating barriers to entry for people who might want to compete with me.
First, on the legal side, I developed legal agreement generators to create a barrier to entry.
Now, could people come in and create a business selling legal templates without those generators? Yes, they could.
But the problem is that if they then have to compete with my product, which has the agreements, the templates, the instructions, and the generators, my product is superior.
Repository of Assets
The other way you can create a barrier to entry is by creating a repository of assets. Someone who wants to come in to compete with you will have to try to catch up. That can create a barrier to entry.
An example of this is my program, BADA$$ Online Marketing University (BOMU). I don’t believe that courses are dead, but I do believe that there will come a time where the notion of having educational courses for free is going to become the norm.
At some point, I believe people are going to stop paying $2,000 for a course about how to build a course or a course about how to build a membership or those types of things. I think the future is in building an implementation-based business, not an information-based business.
With BOMU I’m building an entire library. By the time my competitors or potential competitors decide that they need to shift their business model, I have a free product that already has 25 courses in it. How do they compete with that? How do they make a value pitch of why people should sign up for something they have, which has one or two free courses when they could come over to mine and get 25 or 30?
By building up this library of resources, which takes time and investment, I’m creating a barrier to entry.
Even in the online business space where there aren’t many natural barriers to entry, you can create them. You can create barriers that will protect you and put a moat around your business if you’re willing to put in the work.
My call to action for you is to think about how you could create some barriers to entry in your business. How can you create something that will protect your business over the long haul and protect you from direct competition? This is one of the best things you can do for your business.
Don’t forget to join BOMU where you can access free courses that will help you build your online business. It’s free. No catch. No upsells.