Low Barriers to Entry Are the New High Barriers to Entry

Thursday, March 19, 2015

Many marketplaces can be characterized by the effort required to enter them. On one end of the spectrum is nuclear energy. New businesses in this field have to comply with many government regulations, spend enormous amounts of money to construct facilities and convince concerned citizens that their presence does not foretell the second coming of Chernobyl. Fortunately, other forms of business are much simpler to start. Let's say that I wanted to be a busboy. I could just walk into a restaurant and exclaim "I want to be a busboy!" Bam! I'd be making money in no time.

Conventional wisdom states that high barriers to entry benefit existing players while low barriers to entry favor new entrants. Unfortunately, conventional wisdom isn't always right. In some cases, low barriers to entry are a boon for existing companies and harmful to new startups.

Let's examine the market for freelance software engineers. The market for programmers is akin to the wild, wild west. Unlike doctors, realtors or even (at least in Rhode Island) manicurists, anyone can simply hang a shingle and declare himself to be a software developer. Never programmed software? Never used a computer? Not a problem. The barrier to entry is so low that anyone can anoint himself a crafter of software systems.

Given the large supply of terrible programmers, many nontechnical businessmen have hired their share of poor performers - and paid the price. A poorly implemented system has the potential to destroy a thriving business. As a result, many firms are incentivized to partner with established players rather than take a risk with a new market entrant.

In this case, qualified newcomers are effectively punished by the low barriers to entry, while their more established competitors make out like bandits.

It's strange how business markets can act in the real world - contrary to everything you learned in economics 101! Fortunately there's help. Grab a copy of The Software Pricing Handbook, or request a private consultation. You'll be glad you did!