Making your product or service stand out from the competition is business 101. One strategic way to do this is to build a moat around your organization. Charlie Munger, the former vice chairman of Berkshire Hathaway, defined a moat in business as an “intrinsic characteristic that gives the business a durable competitive advantage.” Here’s what you need to know.
What Is a Moat in Business?
In 1999, Warren Buffett advised investing in businesses “with wide, sustainable moats around them.” Much like literal moats were once used to protect medieval castles, a proverbial moat in business can defend against competition. The broader and deeper your moat, the better your advantage, ensuring long-term success for your business.
A moat should be a characteristic that is inseparable from the core of your business, so if you don’t already have one, it will likely take time to develop. Here are 8 different types of business moats to consider.
- Secrets Moat: A “secrets” moat in business might look like a patented formula or intellectual property exclusive to your company. Pepsi and Coke might be similar products, but the formula is different. Your customers will return if you have something no one else can replicate.
- Brand Moat: This moat involves making sure your brand is the first thing people think of when your product type comes to mind. Starbucks and Kleenex are two businesses whose brands have become so iconic that they are now pillars in their industries.
- Personal Moats: Similar to a brand moat, a personal moat in business is an advantage that only you, as an individual, and your organization can offer. For example, there are many marketing experts, but only one: Neil Patel. His name gives his ad agency a significant and unique advantage over the competition, making him stand out in the industry.
- Network Effects Moat: With this moat, as each new user signs on, the benefit to other users increases. Social media companies are a great representation of this moat in business. The more people use Instagram, the more photos and videos others can see. This encourages continued use.
- Zero Marginal Cost of Reproduction Moat: When there is an upfront cost to developing a product but no cost to continue selling it after that, income becomes passive. This applies primarily to digital products such as PDFs that can be sold ad infinitum without additional time or effort.
- Low-Cost Producer Moat: A business that sells products with a low production cost can offer security to investors. Low production costs often mean a company can be scaled cheaply if other expenses remain controlled.
- Switching Moat: A gym like Planet Fitness is an example of a company that makes it so hard for customers to switch to a competitor that they’re likely to keep paying to avoid the inconvenience. This moat can be tricky, as providing confusing or frustrating service to customers wanting to cancel their account can also harm your reputation.
- Monopoly Moat: We all know companies that seem to have a chokehold on their market share, making it difficult for competitors to rise in the space. For example, Barnes & Noble has a monopoly on in-person book sales.
Once you’ve identified the moat that best serves your business, focus on deepening it over time. It will be worthwhile to offer this type of security to your stakeholders.
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Coach Dave
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