Why does the checkout clerk at the local big box store make significantly less than someone in construction? Sure, there’s the dirty jobs element to it: working inside with low risks to safety and physical discomfort vs physically demanding outside work certainly plays a role, but there are two facts that probably play a bigger (in intertwined) role: there is a low supply of skilled construction workers and, definitely related to the former, there are big barriers to entry for construction work and few for retail.
The focus of this post is how to identify some of the barriers that naturally exist for some jobs and businesses.
First, a barrier to entry is something that prevents others from doing the same work. Perhaps the biggest barriers to entry are found in medicine: doctors require many years of studies, a few years of residency, and licensing in the state in which they want to practice. At the other end of the spectrum, would be a sandwich maker at a fast-food restaurant: most can learn the essential skills in a matter of hours.
Here are some barriers that are fairly easy to create:
Equipment – Do you have (or can acquire) some equipment that allows you to separate what you can offer from others? For example, one of our clients has some specialized equipment that is expensive and has a fairly narrow scope of use. There’s enough work for him, but not enough for a lot of competition.
Exclusive Dealerships – If you are in retail or distribution, attaining exclusive rights for products for your region can provide a great barrier to entry: all roads lead to you. One of the reasons new vehicles are so expensive on Hawaii Island is the Honda, Toyota, Nissan, and Ford dealerships are monopolies–the dealerships on both sides of the island are owned by singular entities. There is zero competition for new cars if you are tied to one make.
Licenses – A contractor’s, plumber’s, beautician, legal or massage license can be a good barrier to entry, though, all are not equal. Real Estate, for example, has licensing requirements, but they are fairly low, so we see a lot more realtors in Hawaii than there are properties for sale. It’s a tough business as it’s one profession that has a low barrier to entry, no inventory requirement, and has the potential to provide a good income if you are exceptional at it.
Capital Intensive Businesses – Agriculture is a classic high barrier to entry area due to the high costs of land in Hawaii, though it can be a low barrier to entry area if you have familial land. Construction, waste hauling, and most logistics/transportation business have high capital costs. Note, though, driving for Uber or Lyft are fairly low barrier to entry activities, and the ability to make good money is fairly limited because of this.
Late Mover – One huge barrier to entry in Hawaii is trying to break into a business area that already has several dominant players. In Kona, Hawaii, you’d be a fool to try to break into large-scale grocery, hardware retail, or commercial transportation, as we have many dominant players that are highly efficient: Safeway, Costco, Lowe’s, Home Depot, Kona Trans, and Robert’s Hawaii. Going niche, like a health food store, can work, but it’ll be a tough go.
All things being equal, a business with one or strong barriers to entry will provide a business with less competition and greater pricing power. One reason we regulate power company rates is they have the ultimate combination of barriers: first mover, capital intensive, exclusive ability to provide reliable electricity, and some strong regulatory protections. A guy with a pickup truck and a bed weed whackers has very few protections because there are very few barriers to entry for lawn care businesses.
For someone who doesn’t mind working for someone else, invest your time to get credentials, skills, or licenses that make you in demand in the labor market.
For an entrepreneur, a good starting point is to ask yourself what businesses are hard to enter and reward well? If it’s very easy to enter, what can you do to differentiate yourself from others quickly and consistently? Note, though, most people overestimate the value of their products and underestimate the willingness of customers to switch suppliers quickly.