Threat of new entrants: what it is and how to spot it
The threat of new entrants is how easily newcomers can enter your market. What raises and lowers it, who the entrants usually are, and how to spot them early.
The threat of new entrants is the risk that new competitors will enter your market and take customers, margin or both. It is one of Porter's five forces, and it depends on two things: how high the barriers to entry are, and how hard newcomers expect the businesses already there to fight back.
The counterintuitive part is that the threat matters more than the entry. Michael Porter put it plainly in his 2008 Harvard Business Review article: "It is the threat of entry, not whether entry actually occurs, that holds down profitability." A market where anyone competent could open next month keeps prices honest even if nobody does.
What raises and lowers the threat of entry
There are two levers, and you need both to judge it.
Barriers to entry. The advantages incumbents hold over newcomers: scale, network effects, customer switching costs, capital, brand and location, access to distribution, and regulation. Each has examples on the barriers to entry page.
Expected retaliation. How newcomers think you will react. Porter lists four conditions that make entrants wary:
| Entrants hold back when | What it looks like in practice |
|---|---|
| Incumbents have fought entrants before | The last newcomer met matched prices and a wave of ads within a month |
| Incumbents have resources to fight | Spare cash, spare capacity, clout with suppliers and customers |
| Incumbents are likely to cut prices | High fixed costs, so filling capacity matters more than margin |
| The market is growing slowly | A newcomer can only win volume by taking it from someone |
Low barriers plus a sleepy, fragmented set of incumbents is the high-threat combination. Most local service markets look like this.
Who the new entrants usually are
Porter names three sources: start-ups, foreign firms and companies in related industries. The third is the one to worry about, because they arrive with customers, cash and a brand already. His examples are Pepsi entering bottled water, Microsoft offering web browsers and Apple moving into music distribution.
For a marketer, related-industry entrants tend to look like this:
- An adjacent tool adding your feature. Your niche scheduling app becomes a tab in the payroll software your customers already use.
- A neighbour widening its service. The plumber down the road starts offering boiler servicing, which used to be your whole business.
- A supplier moving forward. A wholesaler starts selling direct to your customers, which is supplier power turning into competition.
- A customer moving backward. A big client hires an in-house team and stops buying, the sharpest form of buyer power.
A substitute is different again: something that does the same job by a different means. It has its own force, the threat of substitutes.
How to spot new entrants early
New entrants show up in public data months before they show up in your sales figures. A monthly 30 minute sweep catches most of them.
New domains ranking for your terms. Search your ten most important keywords in a private window and note every domain on page one. Compare with last month's list. A domain you have never seen, ranking for three of your terms, is either an entrant or an existing rival changing direction.
New advertisers in the ad libraries. In the Meta Ad Library, choose your country and All ads, search your category's main phrase and scan the advertiser names. The Google Ads Transparency Center only searches by advertiser or website name, so use it to check a suspect once you have a name, not to discover one. If you run Google Ads, the Auction insights report lists the other domains in your auctions, and a new row is worth a look.
New companies registered. In the UK, the Companies House advanced search filters by SIC code, incorporation date and registered office address, so you can list every company incorporated in your category and area last quarter. Most will be nothing. One might be a well-funded rival.
New listings on the map. For local businesses, search your service in Google Maps from your own postcode each month and count the profiles. A new one with 40 reviews in its first month is not a hobbyist.
Names your customers mention. A prospect saying "we're also talking to" a name you do not know is the earliest signal of all. Ask your sales team to log every unfamiliar name.
Record the date and source of each sighting. One sighting is noise. The same name in the ad library, the search results and two sales calls in the same month is an entrant.
Common mistakes
Only counting firms that have already entered. The force is about those who could. If your margins are high and the barriers are low, assume someone is planning.
Defining the market too narrowly. Porter lists this among the classic pitfalls. The entrant that hurts you is often already successful in the next market over, which is exactly why it is not on your competitor list.
Trusting capital to keep people out. Porter warns against overstating it: if returns look attractive, investors will fund newcomers. Money arrives fastest in markets that look profitable and easy.
Scoring it once. The threat changes when technology lowers costs, a regulation lapses or a platform makes distribution cheap. Re-score it every year alongside the other forces, especially competitive rivalry, which new entrants intensify.
Monitoring tools, Figo included, only watch the competitors you name. They will not discover a business you have never heard of, so keep the monthly sweep above as a manual habit.
Questions people ask
Is the threat of new entrants high or low for a small business?
Usually high for service businesses that are cheap to start, such as cleaning, coaching or marketing, and lower where a licence, expensive equipment or a long record of reviews is needed. Judge it by how quickly a competent newcomer could win their first ten customers.
What is an example of a low threat of new entrants?
Commercial aircraft. Porter describes the threat of entry there as relatively benign, with Airbus and Boeing dominant, and the cost and certification involved in building an airliner keep newcomers rare.
Does a new entrant always hurt incumbents?
Not always. An entrant can grow a young category by making it more visible and teaching buyers what it is, which lifts everyone. The damage comes when they chase the same customers on price in a market that has stopped growing.
How is the threat of new entrants different from competitive rivalry?
Rivalry is how hard the firms already in the market compete with each other. The threat of new entrants concerns firms that are not there yet, and it holds prices down even if none of them ever arrives.
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