Whenever any individual launches a new business or any business launches a new product, the most common that everybody does is to seek a completely new market place or an audience that hasn’t been tapped yet. Well, the simple motive behind this is the lack of competition and easy market acquisitions. But do you the problems that tag along with this approach? If there is a lack of the competition in the market for your service or product, then there are two problems: lack of competition means lack of demand for the product and the absence of competition would require huge funds to attract the attention of the potential users as to why they need your product.
You would to surprised to know that competition is a sign of thriving market for the product or service that you are providing and is also beneficial for your brand as such. But simultaneously, such kind of competition also brings along several barriers to enter a new market. Now, many would ask, how would you define a market barrier? So the answer to this would be in the words of George Stigler, according to whom, “A cost of producing which must be borne by a firm which seeks to enter an industry, but is not borne by firms already in the industry.” Whether, you share the same opinion or have different views, as a business person, you have to overcome these market barriers before you claim your share of consumers in the market.
Common Barriers to Market Entry
- Advertising and Marketing
As compared to the brands that have already established their empire, the newcomers have lesser budget for advertising which enable the brands to crush the latter ones whenever they want to. Moreover, when it comes to the exposures, it is the big brands that would take the prize. Thus, it becomes crucial for the new entrants analyze the market carefully and plan their entry quite strategically.
- Capital Costs
Another most common barrier for the new players to enter the market is the complete cost associated with it. The whole equipment that is required to manufacture the product, the complete infrastructure that includes factories and offices, the incurring costs of raw material are sometimes too high to make a grand entry. There are certain markets where the capital costs prevent the entry of new players.
- Monopoly of Resources
There are certain cases when the entry to a new market is restricted through monopolizing one of the necessary raw material that is required for the end product. Or there are chances that the very product that is required to manufacture the desired one, has ended up with a single company. For instance, the production of solar panels is dominated by Chinese firms as these firms have almost sole access to raw silicon that is required for the production.
- Cost Advantages
The experienced companies might have a competitive edge over the new ones in terms of better geographical location or enhanced access to the resources or the raw materials. All these factors facilitate the production of the goods at cheaper rates. Moreover, they might have patented technologies pertaining to the production that would further decline the production costs. These are something that a new entry won’t be having.
- Customer Loyalty
To explain this, let us take the example of soft drinks. Every year, a new kind of Cola, sometimes with better flavor, is introduced in the market and every year, the market witnesses the complete rejection or the slow, yet inevitable decline in the demand of the new product even in the local market. But Pepsi or Coca Cola never have to face any such issue because the brands are enjoying customer loyalty. The brands that are well established have the advantage of customer loyalty over the new products.
When it comes to the retailers and distributors of certain sectors, they are bound under specific contracts that prohibit them to do business with other companies or are given huge incentives not to do so. This can actually make things difficult for the new entrants to get the products to the market and to the customers.
- Economies of Scale
Again the benefits of economies of scale are availed by the large, established firms in the market as they purchase large quantities of raw material in bulk and get them at lower prices. This can make things difficult for the new entrants as it not only makes it difficult to procure raw material, but also hikes the prices of the raw materials.
- Regulatory Barriers
There are certain sectors where the government also plays an important role. Sectors such as telecommunication, airlines and other such sectors are hugely controlled by the various government norms that all the companies have to follow. Now, the new entrants have to juggle through a series of legal loops just to get an entry into the market, let alone popularizing the services or the product. There are certain permissions, licenses and compliance’s that are required in such situations that may add to the administrative as well as financial burdens.
- Inelasticity in Demand
There are several new entrants who try to go with the strategy of the reduced prices just to attract the customers and to defect them from the competition that is existing in the market. But this strategy is not going to market if the customers are insensitive to the prices of the product. Cigarette and cigarette smokers are the best example of such kind of inelasticity in demand. If an individual prefers a specific brand of cigarette, he would stick to it irrespective of the prices.
- Intellectual Property
It is not only the small companies or the new entrants that face issues while entering new markets. The whole world has seen Apple and Samsung getting into loggerheads in the courts for the rights over intellectual property. Copyrights, patents, trademarks are necessary and quite costly to obtain, advertise and the same time, protect as well. When the copyrights of a certain technology is owned by the competitor, the company might have to pay for increased production costs.
- Network Resistance
If the newly launched product is need of a network of consumers to succeed; a network that is already established is quite difficult to break into. In this manner, Google+ would be the perfect example as it is trying hard to get into the social networking business, but it is hard to get victory over the reign of Facebook.
- Predatory Pricing Effects
Sometimes, when the quality of the newly launched product is quite good, the established firms may abuse the sources they have to cut down and restrict the entry and the popularity of the new product. Also known as ‘loss leading’, this makes the competition tough for the new entrants as they are already copy with the fewer resources. Technically, this process is illegal, but again, it is a time consuming process to prove this.
- Restrictive Practices
Most of the airlines have contracts and agreements that give them authority to dictate over the allocation of the various landing slots for the flights at the international airports in the various countries. This would make tough for a new airline to obtain the landing slots and it would eventually, make their entry difficult. Just like predatory pricing effects, this is also illegal practice under several jurisdictions, but challenging the big fishes and proving them wrong can easily drain out the new entrants.
- Sunk Costs
While analyzing a new market, if the overall costs goes beyond the expected limit and the funds are not even recoverable, then would it be a wise decision to leave the market as such (in case, if the product doesn’t receive a warm welcome and the users don’t adopt the product)- this again acts as a barrier as it increases the risks tenfold while entering a new market.
- Switching Impedance
When it is harder to change and it influences the customers as well, lesser would be the risk of shift of customers to another supplier. Let us take the example of banking. Earlier, changing accounts from one account to another involved an extensive manual process that included visiting the branch, filling forms, opening a new account, giving required instructions and above all, the whole process was painfully slow. But as the process becomes electronic, more and more people are switching banks.
- Tariffs and Taxes
There are some markets where the established players enjoy the protection of tariffs and taxes that are levied on the new entrants that are not from the particular jurisdictions. These are highly beneficial to the larger companies as these tax regimes cannot be used by the smaller companies.
Overcoming the Barriers
Now, these are some of the barriers that the new entrants have to face to launch their products. Well, it’s quite clear that the nature of these barriers is quite dissimilar and that is why, there can’t be a set strategy to overcome these barriers. However, the best way to overcome these barriers is to study their nature ad finding the solution before initiating the development of the product. In this way, you can ensure that you have a ready solution for any barrier that is posed in front of your product.