Business owners must “build a wall” around their businesses to avoid advances from would-be competitors, and reinforce their position in the market. Barriers to entry deter new competitors from entering a market, secure the revenues and profitability of established companies, and increase the value of protected businesses. Consequently, businesses with high barriers to entry reduce their perceived risk and command premium prices from prospective buyers. To sideline aspiring competitors, consider the following barriers to entry:
- Exclusive Agreements – with key suppliers, distributors or retailers; problematic for new entrants;
- Economies of Scale – operational efficiencies, new technologies/processes, bulk pricing for materials; declines in unit cost allows price/profit flexibility;
- Product Differentiation – brand identification, customer loyalty; requires major advertising spend from prospective competitors to overcome;
- Intellectual Property – patents, trademarks, copyrights, trade/brand names, proprietary products/services, customized databases/designs, innovative product technology;
- Switching Costs – difficult/expensive for customers to switch providers;
- The Network Effect – value of product or service increases with each additional new/existing customer;
When updating your business plan, consider evaluating the barriers to entry with the assistance of your investments banker for the purposes of maximizing the current and future value of your business.