Startups and businesses face a highly competitive scenario in the market which in turn reduces the profitability of the company and at times the competition from new entrants is so intense that it can throw some businesses out of the market. Hence, creating a sustainable short term and long term entry barrier to the business is of high importance for the startups. An industry with high entry barriers is most attractive to the investor as the potential for profit and return on investment is higher in such industries. Fewer players in the market mean less competition and higher margins for the few companies offering the product or service to customers.
The first step to build an entry barrier is to identify the set of tangible as well as intangible assets owned by the company. Tangible assets are easy to classify and listed on financial statements of the organization, this may be very few for startups in specific. The key to the source of an advantage however, is more likely to be concealed among the intangible assets of the company. These may include structured processes, licenses, government authorizations, propriety designs and trade secrets, patents and copyrights, strong brand names, customized software databases and the like. Startups can develop strategies based on the identified assets that can help them build barriers to entry for new businesses.
Once a set of intangible assets are built it’s important to take note and detailed understanding of why there exists customer goodwill for your company. It’s critical to understand that why the customer is constantly choosing your brand over the competition, are there some reliable delivery timelines or you have a better record of customer satisfaction. Identification and detailed understanding of such success factors can help the startup make a conscious effort of doing the right things and eliminating activities that have not been able to create successful customer value.
Another thing that startups should consider doing to build a strong competitive advantage is to develop a switching cost. The switching cost may not only be financial or legal but also emotional. The higher the switching cost the more difficult it is for customers to switch to competition, of course, it requires a strong selling proposition. Economies of scale is another important cost advantage that can help the startup stand up to competition.