Barriers to entry: types, examples and what they mean
Barriers to entry are the advantages incumbents hold over newcomers. The seven types with examples, and how a small business should enter or defend a market.
Barriers to entry are the advantages that businesses already in a market have over newcomers, which make it costly, slow or risky for anyone new to start competing. Michael Porter's definition is short: "Entry barriers are advantages that incumbents have relative to new entrants."
High barriers protect incumbents' margins. Low barriers mean a new rival can appear at any time, which keeps prices down even before one does. That pressure is the threat of new entrants, one of Porter's five forces.
The seven types of barriers to entry
Porter's 2008 Harvard Business Review article lists seven sources.
| Type | What it means | Example |
|---|---|---|
| Supply-side economies of scale | Bigger firms have lower costs per unit | Intel in chip fabrication and research |
| Demand-side benefits of scale | Buyers value a product more when many others use it (network effects) | eBay, where buyers go because the sellers are there |
| Customer switching costs | Moving to a newcomer costs the buyer time, money or risk | Enterprise software holding years of company data |
| Capital requirements | Large up-front investment before you can compete | Factories, stock, or months of advertising before revenue |
| Incumbency advantages independent of size | Proprietary technology, the best locations, established brands, experience | The café on the busiest corner in town |
| Unequal access to distribution | Existing players have tied up the channels | Supermarket shelf space |
| Restrictive government policy | Licences, patents and regulation | Regulated entry in liquor retail, taxis and airlines |
Porter adds a caution on capital: do not overstate it. If returns look attractive, investors will fund newcomers, and in fields such as tax preparation he notes that capital requirements are minimal and potential entrants plentiful.
There is also a barrier that is not structural: expected retaliation. An incumbent with a record of fighting newcomers hard deters entry as effectively as a licence does.
Barriers to entry examples for small businesses
For a local or small business, capital is rarely what stops you. These barriers do, and each one can be measured this week.
Reviews. If the top three competitors in Google Maps have 400, 250 and 180 reviews and you have none, that is a trust barrier and a ranking one. Count them and write the gap down.
Search position. Established sites rank for the terms buyers use, and a new site takes months to earn a place. Search your ten main keywords and note who holds page one. The Wayback Machine shows how long they have been building those pages.
Advertising cost. Paid search is the shortcut past the search barrier, and it has a price. Keyword Planner's top of page bid ranges for your main terms tell you what that shortcut costs per click.
Licences. In some trades they are most of the barrier. In Great Britain, anyone employed to work on gas appliances in people's homes must be a Gas Safe registered engineer, according to the Health and Safety Executive.
Relationships. Referral networks between estate agents, solicitors and surveyors, or between dentists and specialists, take years to join.
Location. The best sites are already taken. That is Porter's incumbency advantage in a single shopfront.
If you are entering a market
Pick the segment where the barriers are lowest. The incumbent's 400 reviews are for the general service. A specialist offer (one type of client, one neighbourhood, one problem) competes in a space where nobody has 400 reviews yet.
Go around the channel instead of through it. Porter's example is low-cost airlines selling seats online rather than through travel agents, who tended to favour established carriers. The small business version is building demand where incumbents are absent: a community, a partner's customer base, a platform they ignore.
Lower the customer's cost of moving. Much of what looks like an entry barrier is customers' reluctance to change. Switching costs covers how to remove it.
Avoid incumbents who retaliate. If the market leader met the last two newcomers with price cuts, enter where it is not looking.
If you are defending one
Build barriers that also make you better for customers: reviews from every satisfied client, content that answers buyers' questions and ranks, service that would be painful to lose. These are hard to copy and do not breed resentment the way contract traps do. Durable versions become a competitive moat.
Then watch for anyone getting round them. Competitor monitoring for local businesses sets out a routine that takes about an hour.
Common mistakes
Assuming barriers are permanent. Technology lowers them. Website builders, booking software and self-serve ad platforms removed much of the start-up cost in many service trades.
Confusing your effort with a barrier. Your training, equipment and certification only keep rivals out if customers value them or the law requires them.
Counting barriers but not retaliation. A market with low barriers and a fierce incumbent can be harder to enter than one with high barriers and a sleepy one.
Questions people ask
What is the difference between barriers to entry and barriers to exit?
Barriers to entry keep newcomers out. Barriers to exit keep existing firms in, such as long leases, specialised equipment nobody will buy or contracts that cannot be ended, and they make rivalry fiercer because struggling firms keep fighting instead of leaving.
Which industries have the highest barriers to entry?
Those combining huge capital needs, scale and regulation, such as aircraft manufacturing, chip making, banking and utilities. Porter's examples of regulated industries where government limits entry include liquor retailing, taxis and airlines.
Are barriers to entry good or bad?
Good for incumbents, because they protect margins. For customers, high barriers created by regulation or anticompetitive behaviour can mean higher prices and less innovation, which is why competition authorities watch them closely.
Is a brand a barrier to entry?
Yes. Porter lists established brand identities among the incumbency advantages a newcomer cannot simply buy. For local businesses the modern version is a long record of good reviews.
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