Why Barriers to Entry are Critical When Starting a Franchise
You have a great concept and you’re ready to start franchising in order to grow your brand. But, how are you going to ensure that growth? There will inevitably be competition trying to grab their share of the market. If your concept is groundbreaking, you can count on copycats attempting to capitalize on your ingenuity in no time, and quite possibly before you even have your first franchise open.
One of the most important ingredients for an effective growth strategy to take your company from small business to market dominating franchise is developing barriers to entry. Barriers to entry are employed to keep competition low, allowing you to dominate your industry or segment. Keeping competitors, especially copycat brands, at bay will provide a head start for emerging franchisors.
Keep Out Competition
Some of the most common barriers to entry are proprietary processes or systems, patents, trademarks, brand identity, government regulations and high customer switching costs.
- Proprietary Processes and Systems – Whether your concept is unique or a new spin on an old idea, the best way to differentiate yourself from the competition is to develop your own custom processes and systems that give your brand a strategic advantage over your competition. That can come in the form of a cutting-edge customer reservation system, a unique back-end logistics platform, a centralized data warehouse or any number of other strategic alternatives.
- Patents – Patents help protect anything proprietary about your business for a designated amount of time. There are three types of patents – utility, design and plant. Utility covers processes, machines, products, a product component or a composition of matter. Examples of products with utility patents include retractable dog leashes, MRI scanners and even board games. Design covers the unique features and ornamental design of a manufactured product. The Coca Cola bottle is protected by a design patent. Some products may hold both utility and design patents. A plant patent covers a new kind of plant produced, discovered or invented and is capable of reproducing. Patents force competitors to do one of two things:
- Infringe upon your patent, which can lead to a lawsuit
- Invest in research and development to get around your patents
Both are typically costly, which serves as a deterrent to entering the marketplace.
- Trademarks – Your brand’s name is your trademark and may include any word, name, symbol or combination thereof. Your trademark identifies and distinguishes the products you sell or services you provide from those of your competitors. Examples of franchise companies with well-known (and valuable) trademarks include McDonald’s, Subway and Pizza Hut. Like the patent, a registered trademark provides you with legal protection. A trademark readily associated with the products or services you sell forces competitors to invest more time and money into establishing brand presence and recognition.
- Government regulations – Keeping up with state and federal regulations can be costly and time-consuming for emerging franchisors – and it opens them up to financial risks. For instance, a home care franchise concept delivering skilled medical care must abide by a number of rules, including FLSA and HIPAA regulations. When your brand builds compliance into the business model, you set your concept apart from other would-be entrants into the market.
- Brand identity – The image of your brand that you want to convey to consumers is your brand identity. It includes your company’s name, logo, tone, tagline and typeface. Successful execution of your brand identity will lead to a positive brand image among consumers and will communicate your value to potential customers. Brand image is how your company is perceived by the general public. Your brand identity and image need to be aligned in order to be recognized, which will help develop loyalty and create a moat around your business making it more difficult for competitors to penetrate.
- High customer switching costs – Leaving your brand for your competitor should be costly for consumers. High customer switching costs can be in the form of money, time and/or effort. Switching costs help keep loyal customers loyal and prevent competitors from scooping them up and converting them. Take iPhone users, for example. Apple built a loyal following when it introduced the iPhone. Then along came Samsung’s line of Galaxy phones, which gave Apple a run for its money. Switching cost from the iPhone to the Galaxy S4 in 2013 was almost $80 and the loss of the ability to transfer apps and iTunes purchases, such as movies and music. The long time it took to transfer data was also viewed as a cost of switching.
There are other barriers to entry emerging franchises can consider as they develop their plans for business growth, including exclusive rights, trade secrets, scale, vendor and supplier networks and more.
With 30 years of franchising experience and more than 800 franchise owners representing 1,200 locations for five brands, Winmark Franchise Partners can help emerging franchises develop strategies to generate strong barriers to entry. As a franchise advisor and incubator, we have the knowledge and capital to get your brand on the right track. If you are interested in franchise growth, contact us here or at (844) 452-4600.