Barriers to Entry (Airbnb, Groupon, Rent The Runway)
This term is borrowed from Michael Porter’s “Porter’s Five Forces” which is a framework to analyze levels of competition within an industry and business strategy development. For the sake of this post, we will use it to determine the difficulty for a direct or indirect competitor to come into a space and take market share.
Groupon
The biggest barrier would be to convince a business to discount its products to receive immediate cash flow. The payment schedule for Groupons are in thirds; 33% after 7–10 days, 33% after the first month, and 34% after the second month. This is regardless of when the actual Groupon is redeemed.
Plated
This is the most unique barrier to entry — an unknown need. Obviously, sourcing the ingredients for the meals at a competitive price is important, but discovering that people want to cook their own food if they were provided the raw ingredients and recipes was something that had to be discovered.
Airbnb
Legislation is a huge prohibitor to every entrant in this market. A 2011 New York State law prohibits renting residential units for less than 29 days, with certain exceptions. In April 2015, Airbnb asked the state legislature for legalization in return for the collection of hotel taxes. In San Francisco, Airbnb’s home city, Airbnb hosting was illegal under most circumstances and Airbnb hosts had been fined by the city and received eviction notices from landlords.
This situation changed in October 2014, when San Francisco Mayor Ed Lee signed a law legalizing short-term rentals in San Francisco. The law received the moniker of “Airbnb law” as Airbnb was the most affected company. The law requires renters to register as hosts with the city, carry liability insurance and pay the city’s 14 percent hotel tax.
Education is the other barrier to entry. At first, it might sound foreign or weird to stay in someone else’s home. When Airbnb was getting started, it took a lot of meeting with different VCs and had a hard time getting funded. In an email exchange between Paul Graham, founder of Y-Combinator, and Venture Capitalist Fred Wilson, Fred remarked after meeting with the founders,
Rent The Runway
There were three Barriers to Entry for Rent the Runway. The first is my favorite, and it was the unknown need. The thought of wearing a dress someone else had previously worn might make some people cringe. However, through a rigorous dry cleaning procedure, every dress comes out as clean as it ever way without signs of wear.
The second barrier was skepticism from designers. As CEO Jennifer Hyman described in her Mixergy interview, “There was some fear that this might cannibalize retail sales or dilute brand. Jenny (co-founder) and I were very careful to build an extremely aspirational brand that feels high end, that’s targeted to a younger customer who hasn’t yet had the opportunity to purchase the brand. We listened to the feedback of designers, and we molded the business model to actually address their concerns.”
The third barrier would be trying to pull this kind of operation at scale. Rent the Runway is dealing with hundreds of designer dresses, with a dozen sizes, and in a handful of colors. Figuring out the inventory systems that is needed to be put in place in order to properly scale this kind of business can easily crumble any competitor.
Takeaways
There were several themes that kept on creeping up while discussing barriers to entry. The first was legislation. Both Uber and Airbnb (billion dollar companies), are constantly fighting a battle with local authorities. Maybe people in the past had the idea for an Uber or Airbnb, but saw the existing laws as a deterrent. Uber and Airbnb made a calculated decision on moving forward with their concepts and are now reaping the rewards of an untapped market.
The next concept was convincing businesses that your model will help and not hurt them. Groupon, Classpass, and Rent the Runway, seem like they are discounting an existing service and bringing less revenue to existing businesses. However, that is not the case. They are actually acting as a marketing tool for consumers to discover and try the goods/services that their counterparties are offering.
Exercises
- Make a list of all the barriers to entry that your business has?
- What kinds of barriers are they? Legislative? Technical? Patents?
- Can you think of a company that overcame an obstacle that you are facing? If you were to overcome a similar obstacle, will you be exposed to an underserved market?
- Can you think of a reason why a partner business might find your business model threatening? How can you assure them that you’re not a threat?
Experience with past Citadines Group clients
We had a client approach us to build out a store to sell hoverboards to schools. However, they wanted to use a certain distributer, which also sold the hoverboards wholesale. That distributer did not want to do the business deal because they felt as if our client would cannibalise their sales. What we did was we set up the analytics so that if we saw a person originally come from the distributor’s website, but bought on our client’s site, the sale would go to distributor. In this way, everyone was happy, and we could prove that cannibalization was not occurring.
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