Combat Competition by Creating Barriers to Entry

Retail is tough, especially in the current economy. The decorative concrete industry is highly fragmented, the competition is fierce, and there are virtually no barriers that prohibit new competitors from entering your market. But there is good news — you can successfully grow your business and hold off challenges.

Thriving as a decorative concrete reseller requires two fundamental elements: an understanding of the fragmented nature of your industry and, more important, a carefully crafted strategy for creating barriers to entry.

Fragmented industries are by definition comprised of many (small) firms, none of which have significant market share. When it comes to decorative concrete distribution, there are only a handful of national resellers and they are not primarily focused on decorative concrete. The vast majority of resellers that serve decorative concrete contractors are smaller, independent suppliers.

Industries become and stay fragmented due to a number of interrelated factors, such as low barriers to entry, fierce competition, an absence of economies of scale, high product customization, or a dearth of product innovation.

Take lack of innovation, for example. It lessens the need for product specialization or expertise that could be filled by resellers like you. Every once in a while a manufacturer unveils a new decorative concrete product that appears to be revolutionary. These products don’t exactly sell themselves. You and your customers need to understand their value proposition because a deep level of product knowledge enables you to provide better service and compete in a fragmented industry. It is for this purpose that resellers should regularly host product demonstrations and trainings, even if you think your customers have heard it all before.

That said, most decorative concrete product innovations are simply evolutionary — new variations on an existing solution. For example, when another brand of acid stain is unveiled, it’s just more of the same. There is no need for resellers to develop any new “product specialization.”

Low innovation is only one of many factors that perpetuate the fragmentation of the decorative concrete industry. Low profit margins, expensive logistics and lack of buying power are just a few of the unfortunate byproducts of fragmentation.

To combat fragmentation — to reduce the number of small firms with limited market share — you need to create barriers to entry.

If a fragmented industry is the business equivalent of a crowded garden, creating barriers to entry is the equivalent of pouring weedkiller on unwanted plants. Competitors pop up like weeds in a fragmented industry and you’re responsible for creating strategies that keep them from sprouting. Let’s discuss some successful ways to create these barriers to entry.

Exclusivity agreements

You can discourage new resellers from entering your market by controlling the resources. One of the most effective ways to do this is to negotiate contractual agreements with manufacturers and other key links in your supply chain. These are often called “strategic alliances.”

If you can establish exclusive arrangements with manufacturers, you will gain greater control over product supply in your market.

For an exclusivity agreement to be successful, both parties must be willing to take risk. Simply stated, manufacturers must give up the opportunity to sell through other resellers in return for higher volumes. Resellers must invest in inventory and dedicate shelf space in return for exclusivity.

Economies of scale

Barriers to entry are also created by improving economies of scale. This is the result of spreading your fixed costs over a greater “output of production.” As you increase (scale) the number of units you sell (your output), your fixed cost per unit decreases.

There are a number of ways to improve economies of scale. Increase the size of your orders — suppliers extend greater discounts for larger order volumes, so your cost per unit goes down. Shipping companies will also discount their rates as total shipment volume or weight increases.

Depending on your business model, consider hiring a production or maintenance manager to increase efficiency. Or, increase the specialization of a manager.

Spreading variable costs (advertising, commissions, and so on) over a greater output can also contribute to greater economies of scale.

Product specialization

You can try to resell every type of product you can get your hands on and become everything to everyone. Or you can adopt a more focused business model by limiting the number of product lines you represent.

Both models have their advantages and disadvantages. It has been my observation, however, that those resellers who concentrate their efforts on promoting a select few product lines are more adept at thriving in a fragmented industry. They have higher profit margins and greater economies of scale, and they develop more profound expertise with the products they sell. These attributes are very difficult for new competitors to duplicate.

Switching costs

Another strategy to prevent new competition from successfully penetrating your market is to create switching costs for your customers. I call it “loyalty terrorism.” By making it costly for your customers to switch to a competitor, you enhance their commitment to buy from you, albeit begrudgingly.

Ever use eBay? They’ve done a great job creating switching costs. Customers work for years to become “top-rated sellers” with high rates of positive feedback from buyers. If another online auction company persuades sellers to leave eBay, none of those gold stars they worked so hard to earn can be transferred to their new account. So they stick with eBay, even if a better solution comes along.

What switching costs do your customers pay if they buy from a competing reseller? You can create them in any number of ways. For example, a customer loyalty program can help you simultaneously reward your customers and compel them to continue to purchase from you.

A discounted retainer program can allow customers to deposit cash into an account in exchange for discounts they would not normally get. Imagine a concrete staining contractor gives you $5,000 cash in return for $5,000 credit on account. He comes into your store whenever he needs to buy a unit of stain and draws on his credit. But since he’s a “retainer customer” you debit his account $125 instead of the $130 the stain normally costs. Promotions like this encourage ongoing sales, and you will also benefit from available cash flow.

Customer loyalty

Customer loyalty is one of the most important barriers to entry you can create. It’s also the hardest for competitors to duplicate. To foster loyalty, you must offer legendary customer service.

If a customer asks you a technical question that you can’t answer, do you simply tell him to call the manufacturer? Or do you take the time to hunt the answer down for him and (promptly) call him back? If a customer wants to learn how to use an unfamiliar product, do you merely refer him to the supplier’s website or do you actually break out a unit and show him how to install it yourself?

Legendary customer service can pay big dividends in the form of customer loyalty. And I’ll let you in on a little secret: Manufacturers get very concerned about the need for and the quality of their partnerships with resellers when resellers expect the manufacturer to be the primary source of support for their customers.

Brand positioning

Marketing creates barriers to entry through the strategic positioning of your brand in the minds of your customers. It’s a process of differentiating your value proposition from that of the competition. It’s generally determined by two factors — price and quality.

Do customers consider you to be a low-cost or high-cost provider? And are the products you resell perceived to be low-quality or high-quality? The answers to these questions must be clearly communicated in your marketing messages.

Positioning your brand is the battle to climb the hill and drive your stake into the ground. Once you are king of the hill, you have to defend your territory from competitors seeking to capture your crown. The “market power theory of advertising” states that advertising should be used to differentiate your company’s brand image from other reseller brands so that customers see your brand as slightly different, not perfectly substituted by existing or potential competitors.

Marketing creates the advantages you need to defend your position in the marketplace. Such defense does not come cheaply, either. Any new market entrant would be at a disadvantage after you’ve already invested so many resources to position your brand. This makes it difficult for new competitors to gain customer acceptance. I recommend budgeting an average of 10 percent of gross revenues for strategic marketing campaigns.

Jacob Webb, MBA, is a small-business strategy consultant and co-founder and vice president of NewLook International Inc., where he is primarily responsible for business development, sales and marketing. Reach him at

Tips for Creating Barriers to Entry
  • Make innovative products a priority in your inventory.
  • Negotiate with suppliers an exclusive distribution right to your market. Be willing to take a risk (invest in inventory), and you’ll be rewarded with a competitive advantage and greater economies of scale.
  • Don’t be just an order-taker. Buy in bulk — it contributes to greater economies of scale. More importantly, it demonstrates to suppliers that you are committed to proactively promoting their brand. In return, you’ll be rewarded with healthier margins.
  • Invest in the specialization of your managers. The more they know about a limited range of products, the more you’ll sell.
  • Use switching costs to deter customer loss and prohibit new competitors from entering your market.
  • Evaluate your customer support procedures. Fill in the service gaps.
  • Identify how you want to be positioned in the minds of your customers and communicate that message in your marketing mix (product, price, placement and promotion).
  • Advertising should not be used to grow a brand. Use advertising to maintain your brand once you’ve established a competitive position in your marketplace.
  • Make product demonstrations a priority in your business model. Host as many as you possibly can. Move heaven and earth to get your customers to attend. You’ll all develop valuable product expertise.