It’s tough out there. You’ve got enemies after you from all directions. Not just competitors, new technologies disrupting your business, big marketing budgets, ex-employees leaving and starting up against you. I could list a dozen more here I’ve faced over the years.
Point is, you need moats to defend your business. Apart from being differentiated, being defensible by developing moats is one of the most important things you can do for your business.
In this post I will go over some common moats and briefly describe how they work. It’s not a detailed guide but a good mezza plate to give you ideas to explore particular moats suited to your business model.
Powerful brands can sustain pricing power versus competitors. Coca Cola and Apple are the two best examples of this in the market (but note that powerful doesn’t necessarily mean big). Both these companies prices are markedly higher than competitors, they can sustain that and their royal loyal customers may occasionally question it but they justify it in the same thought and stay on.
Network experience effects
Network effects you create in your business need to make your customers experience better, not just be a general network effect. Chat about a new coffee shop opening in a local community is a general network effect but does not mean a better experience for the customer. The experience might be improved if one person can give the other a free coffee voucher.
Examples of this are Uber or recently in Australia a company called Beam (owned by Commbank) who was getting kids to give each other $5 to encourage their friends to open accounts. I don’t actually agree with doing this ethically but it serves as an example. Startups competing against Beam wouldn’t have the capital to do match this ongoing deal but being a large bank they could in effect use their capital base as a moat effectively differentiating their sales/marketing versus smaller competitors.
Network effects are impacted by the law of diminishing returns. CAC/LTV ratios can change over time, they get worse but many companies think they stay flat or will get better with economies of scale but they don’t.
It takes time various amounts of time to copy a product. This provides some industry specific lead time advantages. It can be a good moat for some industries but not worth chasing in others.
Amazon cleverly started Prime to help differentiate themselves to other ecommerce players with free shipping and tech-free ecommerce presence. While some might argue this is a feature rather than a moat the thing that makes this moat is that a competitor can’t implement it without scale. Relationships with freight carriers, access to cheap AWS cloud hosting, technical advanced ecommerce platform and being able to parallel ship from different resellers in one run to a customer. These all require scale and there are none even close to Amazon.
Margin is one of the strongest financial moats. If you can suffer heavy margin pressure because your margins are thick then you can outcompete competitors and survive in price wars, weak economics times or new entrants coming in to the market.
Too much to loose
On several occasions partners had to leave Saasu when a large competitor told them it was us or them. We’re smaller so it forced the hand of the Advisor or Add-on. This is technically illegal in some countries. So I’m not suggesting this is one to adopt, I never would, but I’m mentioning it here so you know that it is a moat people will use against you – the “us or them threat” has been used for centuries. Join the biggest army or become the enemy.
A friend of mine used to resell products for white goods brand. Then others in ebay/amazon etc caught on and started doing the same. He had no moat. So he decided to seek out the original manufacturer and began making a line that designed by himself. They are unique and branded under his own brand. Other eBay traders couldn’t access the product at all. It was his alone. The only problem remains that you are trusting the ethics of the manufacturer.
I don’t like or believe in patents. Why should a chocolate company have rights to a particular hue of purple? Why do companies own the genetics on things like the genetic code for a pre-existing plant that evolution or God actually created.
These are useful moreso to prevent parasitc effects of people using your brand to build wealth. E.g. If you attempt to use Apples brand to sell products you will promptly receive a cease and dessist. It also allows brands to prevent 3rd parties using brandwash as a free way to use some of your brand to build their own. You can’t just say you sell Apple products implying Apple is ok with that. You need to have gone through the process of being an approved partner or supplier with them.
Creating human language
“Just Google it”. Can’t be taken by a competitor. Colorbond the product is now the standard industry term and the language Australians use to describe what used to be called corrugated iron.
These are a strong customer retention moat. Companies often make it hard to leave them. I don’t like it so I actually break down this moat in our own business as the ethics of having this moat outweigh the benefits to the business. So at Saasu we have built fairly good systems to let people get their data out when they leave. Some business using switching costs to stop people leaving. Banks being the prime example. It’s why we have seen so many delays on Open Banking. The sector knows it’s a huge moat they don’t want to give up.
Some people like myself put quality and aesthetics right up the top of purhasing decisions. We naturally decline many products quickly on this alone. Companies like Thule, Mercedes, Apple, Sony, Kenwood, DeWalt, Snapon and more achieve high quality and design standards.
Local monopoly moats
Westfield in Australia mastered this moat in the 80’s. If you own the local mall and you have all the key brands competitors can’t setup another mall next to you.
Systemic monopoly moats
Youtube is by far the best example in the world of this. You will not find another product that has as much skew into a single supplier as this one does. It’s systemic. To get traffic and make revenue as a content produer you have to be on their platform. I hate it, but it’s true. It’s the scale that acts like gravity and sucks in even the most unwilling of content consumers and producers.
Economies of scale
Who would have thought something about traditonal keysian economics would be right. Amazon has massive scale, massive range, huge deliverability, low prices. It is very hard for a competitor to achieve this. The moat is actually time and money. It does have limits but its’ real. Amazon isn’t even shy about it. They say variety, free delivery and low prices are their mission.
If you can get product or services to customers in a way that is unique to your business then economic circumstances may arise that support you. For example if you are able to deliver weekends locally while you are still small, as the owner, then you are outcompeting larger competitors locked into the Monday to Friday freight paradigm. You are using your local position and your ability to DIY delivery as differentiation which may keep a customer with you.
Home Brand Moat
When you make the product you sell to retail you create two moat effects in one act. Your competitors can’t access that product and you receive more margin than you would if you wholesaled that product to retail distributors. Aldi is a good example of this. They drive for value + quality for money. They make their own products and you can’t buy them elsewhere. They also get the full margin because there is no wholesaler or middle man. Netflix has done the same by creating unique content.
A business may become so intertwined in your life that you cannot unravel yourself from it without significant inconvenience. It’s what I refer to as a “Divorce Moat”. Breaking up from your bank is a classic example of this. It is so hard to move that you put it off. From the banks perspective this is an incredible strong moat that they currently have. However, for the customers there is hope that this breaks down with Open Banking coming out in the next year. It will allow easier transfer between banks.
Bunnings is a place of worship for weekend DIYers. It is embedded in culture, in mindset that one of the most powerful australian retailers, Woolworths couldn’t displace them with the failed Masters. Even before starting to compete Woolworths new Bunnings parishinors would not switch so instead they decided to try and target a new sector being female home improvers, maintainers and renovators.
Channel Revenue moat
Referral fees and commissions act as moats for your business. Your channel partners have to give up these revenue lines if they want to leave you.
Word of mouth
Common thought and academia suggest that word of mouth is not a moat in itself. However in doing so we ignore one of the most powerful moats in business. It’s one of the most separating and segmenting forces in human nature. The human trait of belief in a cause, religion or paradigm. It’s the way of their tribe. Your customers build a moat around your business when they emotionally speak about you. Word of mouth is not just a simple commoditised free advert. It’s not just a distribution channel. This is because it has evangelical, religious or tribal behaviours associated with it.
Your royal loyal customers, the preachers in your tribe will actively downplay other brands in the same conversation as they promote yours. The moat is dug between one brands tribe and another. That moat is one of the hardest to cross in all history. You have to change the customers mind on a brand and switch them to yours. That churn protection from word of mouth is very valuable.
Generally not a moat, data in high levels of supply diminishes itself through commoditisation and oversupply. Credit card spending pattern data is an example of this. Specific data can act as a moat though. For example it is hard to transition from Salesforce CRM to simpler CRM systems because the complexity level of customer data and tracking can be moved into target systems. If you want to keep it there’s a huge moat to fill in the form of working out how to export, store and later recall that data.
Personally we don’t use this moat in Saasu.com. We recently spent lots of time in helping international customer leave us by building additional tools to export data. We feel that allowing people to leave us will also encourage them to come to us, to trust us.
I hope this is a bit of a taster to get you thinking.
Photo by Zhao Chen