Growth is one thing, but how do you get profitable?

High growth businesses become profitable by making life difficult for competitors. Here's why (and how)

High growth businesses become profitable by making life difficult for competitors. Here’s why (and how)

All businesses reach a certain size where more growth will deliver diminishing returns. Where this point lies depends on what sector the business is operating in, but the solution remains the same everywhere: this is the point at which the business must find out how to become profitable in a sustainable manner.

At a basic level it is difficult for businesses to remain profitable in the long term without performing some kind of action to stymie the growth of their competitors and create artificial barriers preventing new players from entering the space. The less competitors a business has in its niche, the more profitable it will become over the long term.

What is a barrier to entry?

In some ways the word ‘barrier’ is misleading, as a barrier is something that is considered almost impossible to overcome. Think of a barrier to entry as a hurdle: the runner must expend extra energy in jumping over it, however the runner is still able to get to the finish line eventually. In business terms this is commonly increased price paid or increased effort expended by your customer or supplier in order to get the same result.

How are businesses using barriers to entry?

Some barriers to entry are time-honoured classics from marketing and retail: features which allow users to customise their experience with your business. By ‘locking them in’ you make a customer more comfortable doing business with you, creating a hurdle for competition to overcome. Loyalty programs, personalised suggested items and referral discounts are all mechanisms which make the customer more likely to return to you for repeat business and less likely to go to a competitor, where they can’t collect the same advantages.

Peer to peer marketplace businesses such as Uber, Delivery Hero or DocPlanner, are leading the way in creating new barriers. These marketplace businesses build barriers into either the supply side or demand side of their businesses, or both, in order to make life difficult for newcomers. This can be anything from incentivising your suppliers to withhold their service from competing platforms to providing a faster service for customers.

Businesses successfully maintaining barriers to entry

Online food delivery companies JustEat and Delivery Hero both created barriers to entry during their growth phase, and it’s paid off: JustEat is already a public listed company valued at £2.6 billion, while Delivery Hero was valued at €2.7 billion during its last funding round.

Delivery platforms such as these sometimes require participating restaurants to use specific hardware to track orders coming in via the website. For restaurants, these devices are a minor but noticeable operational hassle. It is impractical for the team to work with more than one or two of these devices at once, thereby creating significant challenges for a third party entering the market: this newcomer would have to either explain the benefits of working with a third system, or justify replacing one existing system with a new one.

On-demand doctor services are a very fast-moving area with several high-growth companies competing in this space. DocPlanner is the largest European contender of market leader ZocDoc, providing customers with an easy to use portal for browsing doctors. On the supply side, DocPlanner tries to make life as easy as possible for its doctors by providing advanced calendaring and booking systems. These features allow doctors to track their bookings from all sources, not just those from DocPlanner. This means it makes little sense for doctors to use an admin system in addition to DocPlanner, and this presents a significant challenge for competitors offering a similar product.

These are sector-specific examples, but they demonstrate the creativity required to successfully navigate the transition from growth to profitability. Barriers to entry cannot get too inconvenient for either customers or suppliers, otherwise they will have the opposite effect intended. Business leaders should start by taking a critical look at their business models and identify pressure points similar to the ones described above where they have a real opportunity to differentiate themselves and lock-in their customers and/or suppliers. To do so will starve their competitors of growth opportunity and lead to profitability.

Alex Frolov is a partner at Target Global

Praseeda Nair

Praseeda Nair

Praseeda was Editor for from 2016 to 2018.

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