Barriers to entry and exit in market

• Barriers to Entry - a Definition

• "Anything that prevents or impedes the entry
of firms into an industry and thereby limits
the amount of competition faced by existing
firms"  
 Structural Barriers to Entry

• Structural barriers to entry are the natural or tactical barriers

that arise in a market preventing new entrants
• More common examples are of Barriers to entry are
examined below:

1. Brand Identification & Loyalty

• Superbrands such as Coca Cola and Pepsi have clearly
differentiated themselves in what could be a highly
competitive market.  
• Their respective images are key for consumers to choose,
despite little difference of the actual product sold.
2. Scarcity
• Scarcity requires companies to make economic decisions to
control access and allocation of such resources efficiently.
3. First Mover Advantage
• Competitive advantage can be earned by a company by being
the first firm to enter a specific market or industry.
• A good example of a first mover is eBay which was the first
company to take the auction process online, kicking off
operations in 1995.
4. Experience and expertise over time
• Binding available talent and know-how in a market is a way for
an incumbent to create a barrier to entry. The challenge is for a
new firm to learn and development against an established
group or single incumbent who has extended trading history
and talent at hand in a given market.
5. Economies of Scale

An increase in production efficiency directly related to size is a typical way to create a

barrier for new firms, principally through the ability to produce at a significantly lower
marginal cost.  

Economies of scale provide big companies with access to a larger potential markets with
greater geographical reach. For small to medium size companies however, size does have
its limits. At a certain point, an increase in output leads to an increase in production
costs. This is called "diseconomies of scale".
6. Cost disadvantages establishing product differentiation
Differentiation is achieved by making a product more attractive by comparison to other
competing products. Unique qualities, creative ways of packaging or new functional
features are some example of differentiation.

7. Capital Requirements
•Significant capital expenditure is sometimes required to enter a new market.  This could
be an investment in machinery, distribution facilities, real estate or other sunk costs.  
 Strategic Barriers to Entry

• Barriers rooted in the market structure are

likely to encourage firms to react strategically.
 
• In other words, if market barriers are thought
to be insufficient to deter market entry firms
can take tactical steps to prevent  market
entry from new competitors and protect their
market power.  
1. Excess Capacity
• This describes a firm who's actual production is less than what
is achievable or optimal. It often means that demand in the
market for the product is below what a firm could supply to
the markets.  
• Excess capacity is also seen as a good thing for consumers, as it
is not likely to lead to the price inflation that would be seen in
periods of near-full capacity.
2. Predatory pricing
• A more aggressive barrier to entry is when a firm deliberately
lowers prices to try to force rivals out of the market and
eliminate competition.
• Again the price can be lower than the short-run marginal cost
of production.  Once the rival has been forced out of business
the incumbent returns its prices to normal levels.
3. Limit Pricing

• Limit pricing describes a situation where a firm or firms who

are able to obtain monopoly rents from customers
deliberately lower the price of their goods.
• Incumbent firms are able to maintain a loss making position
in the short term producing a higher quantity at a lower price
and therefore capture greater market share leaving  less room
for new entrants.
4. Collusion
• By collaborating with each other (which often is prohibited
and regulated), firms attempt to gain an advantage by altering
the price of a good and virtually  establishing a  non-
competitive agreement between rivals to disrupt the market
equilibrium.
 Regulatory barriers
Government Regulation
• in particular, franchises, patents,  copyright
and tariffs.
Different countries and political arrangements
lead to a host of barriers that are consciously
put in place, aiming to protect a countries
economy or particular industries that may be
vulnerable on a open market competition. 
1. Copyright
• The ownership of intellectual property by the item's creator. Copyright law gives
creators of original ideas, art, etc. the exclusive right to further develop them for a
given amount of time, at which point the copyrighted item becomes public
domain. 
2. Franchise
• In some countries the government will award exclusive rights to a firm to supply
goods or services granting a license to control entry to a specific market area.
3. Patent
• A government license that gives the holder exclusive rights to a process, design or
new invention for a designated period of time. Applications for patents are usually
handled by a government agency.
4. Tariff and Non-Tariff Barriers
Tariffs
These are charges imposed on imports as well as direct taxes. Often used by poorer
countries to obtain revenues to the state and protect domestic industries.

The most common tariffs are:

- Specific: charges on specific products, either by weight or volume.
- Discriminatory: charges on goods coming from a particular country.
Non-Tariff
Tariff barriers have declined in most developed countries, however non-
tariff barriers have increased substantially at the same time. The most
common non-tariff barriers are:
- The state participation: used by countries to obtain competitive
advantages.
- Bureaucracy:  based on protectionism often consisting of safety
regulations, administrative delays in the form of product inspections and
uncommon technical standard requirements.
- Quotas: based on limiting the quantity of a commodity. The state set limits
in terms of, amount or weight of a certain product allowed to or leave the
country.
- Financial controls: often used in countries with high inflation and
shortages of hard currency.
 Exit barriers
• A barrier to exit can be caused by  high fixed
costs, for example in auto manufacturing.  It
can also be perceived as a barrier to entry for
competitors
• Examples of fixed costs include rental lease
payments, salaries, insurance, property taxes,
interest expenses, depreciation, and
potentially some utilities
• sunk cost or heavy investment in infrastructure or equipment, of the sort
that cannot be readily adaptable to  another industry.   What Is Liquidity?
• A negative cashflow cycle, or a liquidity issue, can also be a barrier to
exit.  
• Liquidity describes the degree to which an asset or security can be
quickly bought or sold in the market at a price reflecting its intrinsic
value. In other words: the ease of converting it to cash.
• Situation where the cash outflows during a period are higher than the
cash inflows during the same period. Negative cash flow does not
necessarily means loss, and may be due only to a mismatch of
expenditure and income.

Barriers to exit can also be of a regulatory or governmental nature.

• The likelihood of exit is also related to the size
of the firm, with smaller companies more
easily displaced than larger companies, given
their lesser market power. A larger firm may
also choose to only partially exit, being
otherwise sufficiently diversified.
 Marketing strategy
A right marketing strategy plays an important role in the success of a
business. Every company chooses and spends a lot of money for the right
marketing strategy to boost their sales. Powerful companies opt for more
than one marketing strategies.
 
Lets first learn about why businesses spend millions in the marketing of
their products.
1.  Right marketing technique increases the visibility of the product.
2. People become familiar with your product, thus, they start trusting you.
3. Marketing creates loyalty for the brand for both prospects and existing
customers.
4. Marketing builds the credibility and authority of the brand in the market.
5. Effective marketing positions a brand as an expert in the market.
6. Motivates customers to move through the purchase decision making.
You might need more than one business marketing strategy to keep your
business growing. Different market strategy can be used to target different
audience at different stages. In this article, you will learn about the
different types of marketing strategies.
 
1) Business-to-consumer :

B2C market strategy is for those companies which market their products
directly to consumers. These types of businesses can work online or in
store. A business-to-consumer strategy is consumer driven. You must know
your customers inside-out. There preferences of social media, where they
live, and how much money they earn.
 
2) Employee marketing
The strategy of this marketing type is to overtake its employees as
potential customers and brand ambassadors. We all know that
companies provide employee discounts as a part of their deal. Mostly,
employees buy from their employees as long as they are getting the best
deals. In this way, employees become the advocate of the company.
They not only come to work and get paid, but they promote your
products and thus, help you to generate revenue. They will recommend
your products to their family, friends, and acquaintances. they might
share about your products on social media and can refer potential
employees. Therefore, never make a mistake to ignore your employees
while building a market strategy. They can be loyal customers of your
business if treated right
3) Business to Business :

Business-to-business marketing takes place when a business markets its products and services to
another business.
For instance, you produce equipment of machines, you are doing a business-to-business space. It
requires a different approach than business-to-consumer marketing because there several more
steps involved in it.
 
4) Direct selling :
 
There are few products which can be sold by meeting your customers face-to-face and providing
them a demonstration of your products. For example, if you selling a product used at home. You
can call a group of customers in one person’s home and can provide a demonstration about how
that product works.
There are companies like Amway, Vestige, Avon which apply direct selling marketing strategy to
built their businesses. This market strategy is less expensive but works for a few products and it
requires sales skills and an extrovert personality to convince your customers to buy products.
5) Cause marketing :

Many companies opt for this marketing technique to boost their sales. People get drawn towards
the businesses which are working for a cause. They feel good knowing that their money is being
used for a good cause. Therefore, there is no harm to opt for this strategy which benefits you as
well as the community. To do this, you need to get into a partnership with a charity organization.
You can choose the cause of providing education to orphan children. For this, you can partner with
an orphanage or an NGO working for this cause. Later, you can let your customers know so that
they can add to a donation by purchasing things from you.
 
6) Earned Media/PR :
 
In the modern era, there is hardly a person who isn’t aware of this type of marketing strategy.
Companies pay a lot of money to promote their products on various media platforms like
newspaper, television, social media etc. They even pay celebrities to promote their products.
People trusts earned media than any other sort of promotion.
 
7) Co-branding and affinity marketing :

By using this marketing strategy, you share your customers with businesses that compliment your
own business. For example, if you are selling Yoga related products like a yoga mat, yoga pants etc.
you can tie up with a famous yoga instructor to promote your products by sharing a percentage of
profit with them.
If you follow yoga instructors on Instagram you must have seen them promoting products of
certain brands. It is clear that co-branding or affinity marketing represents a partnership between
two businesses with similar interests.
 
8) Internet Marketing :
 
Internet marketing includes various marketing from social media, blogs, email, vlogs to landing
pages. Any type of marketing that you conduct on the internet is called internet marketing.
However, internet marketing requires a strategy that how and when you post your posts and how
you encourage people to purchase your product.
 
9) Point-of-purchase marketing :

Point-of-purchase marketing strategy includes placing your product where customers make the most purchase. You must have noticed that
many small products are being placed near the cash counter. This is done intentionally so that people make an impulse purchase. In addition
to this, you must have experienced cashier who tried to sell your product. This is another example of POP marketing.
 
10) Word-of-mouth advertising :
 
Traditionally, word-of-mouth advertising was limited to face-to-face praise of the product. Nowadays, the method of this type of marketing
has been changed. When people mention your services or products on their social media page and give a positive review, they are doing
word-of-mouth advertising of your business. You can also pay some review bloggers to write reviews about you.
 
11) Paid media advertising :

Paid media advertising is the best solution to grow your business fast. Obviously, you will have to liquidate capital to get results. But there is
Return of investment on every penny you spent. Followings are the types of paid media advertising.
• Paid search
• Paid social
• Television and radio commercial
• Display advertising
• Print ads
• Billboards
 
12) Storytelling :
 
Storytelling is an emotional way to reach your audience. You can produce personal stories, brand stories or a story of
one of your customers after taking their permission. There is one more trend of saying a story in exactly six words. Here
writer requires great writing skills to create a short meaningful story. This type of marketing strategy helps you to win
the trust and loyalty of your customers.
 
13) Referral Program :
 
This type of marketing strategy makes the use of your existing customers to get new customers on board. You pay some
incentive or benefits to your customers if they ask their friends to buy your product or service. People usually do word-
of-mouth marketing to get the benefit. The amount you pay to them is quite small in front of the returns you are
getting. Find the way to keep the track of referrals done by your customers before giving them benefits.
 
14) Growth Hacking :

This type of marketing strategy is used to gain resurgence in the audience in a short span of time by hacking into one of
the internet marketing strategies. There are many professionals who can do this job for you in return for money. One
method is to try several marketing strategies simultaneously. You can get a huge amount of data by following this
technique.
15) Networking events :
Yes, internet marketing will get your audience. But there are other marketing techniques too that you cannot do from
behind the computer screen. For this, you need to step out in the real world and organize some networking events to get
prospects who might enjoy your services. For example, if you are providing an online course, you can set up a booth where
people can reach you and you can share knowledge with them about your course and encourage them to take the course by
providing them additional discounts.
 
16) Content Marketing :

People enjoy participating in contests. You can use online platforms like Facebook, Instagram, YouTube or other online
platforms to run contests. Organizing contest is the best way to direct traffic to your website and optimize the conversion
rate. You can keep digital devices or travel tickets as prize money.
 
17) Retargeting :
 
Using this type of marketing you target people who have shown interest in your business before. For example, Facebook let
you place a pixel on your website. A user will see the ad of your product on Facebook if he/she has recently visited your
website.
As they already know about your brand, they will recognize it and there are high chances for them to get convert. There are
other retargeting platforms too like Instagram, YouTube etc. where you can retarget your prospects.
 
18) Search Engine Marketing :
Everyone wants their content to appear first in a search engine using search engine optimization (SEO). Search engine
marketing can help you generate a massive return on investment. To do this, you need to have unique, creative, value-
driven content so that your content appears appealing to search engine. You can learn online how to use search engine
optimization to market your products and services.
 
19) Social Media Marketing :

Businesses make the use of social media platforms to share value-rich content and directing traffic to their websites
and landing pages, thereby, improving brand awareness and multiplying customers. social media marketing strategy
works better if you know how to use hashtag, links, images, and videos to increase engagement.
 
21) Inbound Marketing :
 
This type of market strategy is effective when you want to build a positive relationship with your prospect audience
without spending too much money. This includes marketing strategies which attract your customers to your business
like a magnet. You can make your presence visible on social media use an email list to share free content. As people
have become blind to television advertisement these days. This type of marketing strategy will surely get their
attention.
•  
22) Influencer Marketing :

This type of marketing involves online influencers like bloggers, YouTubes to

recommend your products and services to their audience. You can either
give away free products or pay them to promote your business. Every
influencer has its own terms and conditions. You should discuss with them
before lending into partnership.
 
23) Behavioural Marketing :
In the present time, businesses can generate more data than ever before in
history. Behavioural marketing exploits this advantage to target specific
consumers. By tracking IP address, cookies, and web histories you can make
sure that your audience is viewing your content at the right time.
 Pricing methods
 

The pricing technique can be selected from the available pricing models by evaluating the most suitable
technique that will meet the needs and is most satisfying to customers. The various pricing models are:

a) Cost based pricing- it is simply calculated by adding the profit to the cost of producing the product to
arrive at the price.
 
b) Skimming: in order to break even the fewer sales, products are sold at a higher price to gain larger
margins on them. This technique is not useful in grabbing market share.
 
c) Limit Pricing: It is usually employed by the monopolist to ensure that no competition exists in the market.
It is done by making the price of the product lesser than the cost of production.
 
d) Loss Leader: it is used to increase the market share of the company and is done by reducing the price to
the lowest in the market.
 
e) Penetration pricing: it is a strategy to grab the market share and is similar to the loss leader except that
the company simply reduces the price to increase its share of the market with no intention to grab the
maximum share of the market. The price is usually set for a short run and is increased in the long run.
f) Price discrimination: it is the practice of setting different prices for the same product for the different segments
of the market.
 
g) Premium pricing: it is used to increase the perception of the customers. This is done by increasing the price of
the product very high to give it a snob image.
 
h) Predatory pricing: this is an aggressive way of pricing and is done to eliminate competitors from the market.
 
i) Psychological pricing: based on the belief that customers base perceptions of a product on price.
 
j) Dynamic pricing: used to change the price of the product depending to the dynamically changing willingness of
the customers to buy a product.
 
k) Price leadership: the market leader usually dictates the price of the product in the market.
 
l) Value based pricing: it is pricing of a product by evaluating the value added by the product to the customer.
 
m) Pay what you want: it gives freedom to the customers to pay whatever they want to.