Starting a Business
If you have just started a business or are thinking of doing so, you have countless issues to deal with in making your company a success. You need to:
- Develop products and/or services.
- Name your company and products/services effectively.
- Address all legal details.
- Raise sufficient funds.
- Develop a marketing plan.
- Build a website.
- Hire employees, etc.
The list seems endless.
However, one major factor in the probability of your company’s success is rarely written about, and worse, is often forgotten: Barriers to Entry.
Barriers to Entry
One of the most effective things that you can do for your startup is to build barriers to entry, strengthening your competitiveness and making it more difficult for your competition to encroach on your opportunities.
What is a barrier to entry? Pretty much as it sounds, it’s an aspect of your business that makes it more difficult for any potential competitor to enter your business space and sell the same products or services to the same audience.
For example, if you want to start an accounting service, restaurant or technology consulting firm, what is it that would prevent any competitor from setting up shop right next door to you and capturing all of your potential customers? Anyone with financial resources can create these businesses.
And so you need a bit of creativity to identify and build effective barriers to entry to insulate yourself from the competition and to strengthen your uniqueness in the eyes of your customers.
It’s often said now that more and more products and services are becoming commodities. Therefore, it’s becoming harder and harder to differentiate yourself and to effectively compete.
Even so, there are plenty of ways to build barriers to entry into the foundation of your business. You are limited only by your creativity.
With the above in mind, the following are examples of the types of barriers to entry that you can explore to build a competitive advantage:
- Business Model
If everyone else in your industry does things the same way, do things differently. Netflix did this with DVD rentals. While everyone else thought that DVDs needed to be housed in a local store and selected in-person, Netflix introduced a web- and mail-based system that suited many people’s lifestyles more appropriately.
Sometimes the infrastructure for the business delivers a solid barrier to the competition. Idealab is an innovation incubator, responsible for a string of successful companies ranging from GoTo.com (that started the paid search marketing industry) to Picasa (later bought by Google). By leveraging a centralized team and support center, the company is able to deliver innovations with surprising frequency.
If you have a web-based business, you can consider creating the most amazingly useful website in your industry. By constantly innovating, you can eliminate many potential competitors who are simply unwilling or unable to keep pace with your investments, innovations and improvements. Salesforce.com is an example of a business that leverages the website itself as an effective customer acquisition tool, customer support resource and developer platform.
If you are in a labor-intensive industry, how can you automate the process through a web-based solution? LegalZoom.com is a website that automates a number of otherwise time-intensive legal tasks via an online, templated service. As a result, traditional lawyers cannot compete with LegalZoom.com’s extremely low prices.
Is there a technology advantage that would separate you from the crowd and concurrently establish a barrier to others catching up to you? For example, the solar power firm Nanosolar has developed a proprietary process technology that makes it possible to produce 100x thinner solar cells 100x faster. It would take a huge investment by a competitor to try to match Nanosolar’s lead in this area.
Any time you can establish exclusivity, you make life more difficult for the competition. For example, you can gain exclusive rights to products or designs or territories. You can secure exclusive partnerships, whether as part of the supply chain or the distribution and sales chain. Another approach to exclusivity is to create an “invitation only” service, as long as you can create something that is far more valuable than what the competition is offering.
If you can remove complexity in an industry, audiences will be receptive. SmartPak did just this by introducing a simplified packaging solution in the horse supplements industry, which traditionally had involved horse caregivers sorting through seemingly endless combinations of supplements for each horse every day, often mistakenly delivering the wrong medicine or the wrong dosage.