Thus, it increases the barriers to entry because it is less likely to acquire new customers.

Customer switching costs.В High switching costs discourage consumers from switching to new products.

It is unlikely the new entrants will reach economies of scale, break-even, and operate profitably soon. If an industry requires significant sales volumes to achieve economies of scale, entry barriers are likely high. If the costs of overcoming the two things are lower than the long-term profit, they may choose to step in, even if they struggle.ДЇurthermore, several factors that influence barriers to entry to the industry are: New entrants will weigh the long-term costs and profit. Likewise, if incumbents are likely to retaliate and launch a powerful attack, new entrants might hesitate to step in. The high barrier of entry reduces the threat of entry. The significance of threats of new entrants depends on two things:

The threat of entry increases investment to deter new competitors and maintain current market positions. They sell low prices to attract as many and as fast customers as possible. New entrants will often adopt aggressive strategies to build a customer base and gain market share, for example, through a penetration pricing strategy. Incumbents must ensure their prices and products remain competitive. The high level of threat of entry limits the profit potential of an industry. To stay competitive and maintain market share, incumbents must rethink their competitive strategy They have the potential to put pressure on prices, costs, and the level of investment needed to compete.ДЄdditional capacity increases supply in the market and pushes down market prices. They bring new capacities to the market and seek to gain market share. You gain more in-depth insight into the key variables that determine industry competition and profits. This model offers guidance and makes it easier for you to analyze the industry. Capital market analysts or banks use it to select an attractive industry for investment allocation or lending. Management may use it as input in strategy development.

This model provides an important framework for analyzing the competition.

If all five are strong, the industry offers a low return on investment. Those five things are essential to explain why one industryвЂ™s profitability is higher than in other industries. Those forces include the threat of new entrants, competition among existing companies, the threat of substitute products, buyersвЂ™ bargaining power, and suppliersвЂ™ bargaining power.

Switching costs threat of new entrants