Barriers to Entry

With homage to Arthur Lipper, a mentor and friend

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 today.

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.

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About RAAckerman@Cerebrations.biz

A polymath whose interests span chemical engineering, medicine, biotechnology, business, management, among other areas. Among my inventions/developments: dialyzer, dialysate, neurosurgical drill, respiratory inspirometer, colon electrolyte lavages, urinary catheters, cardiac catheters, water reuse systems, drinking water system, ammonia degrading microbes, toxic chemical reduction via microbes, onsite waste water treatment, electronic health care information systems, bookkeeping and accounting programs, among others.
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