How To Build A Competitive Advantage With A Business Moat

List of Business Moats

Once you learn these, you’ll start to see them everywhere.

Secrets Moat

This is a secret that the company has that gives them a competitive advantage.

Examples include Coke’s syrup recipe, the code for Google’s search algorithm, or a patent for a new drug.

Brand Moat

Apple comes to mind immediately. It’s a premier brand built around the feeling of an Apple product.

That’s what a brand is - an intangible asset that has been built up over time and has value for the customer.

A strong brand means the consumer is going to get exactly what they expect, every time.

Network Effects Moat

There’s one thing that Facebook, Twitter, TikTok, and all other social media apps have in common: network effects.

A business has a network effect moat when each new user adds value to the existing users.

Zero Marginal Cost of Reproduction Moat

Digital media and software is scalable because it costs nothing to replicate. If there is no cost associated with reproducing or redistributing work, we say the product has zero marginal reproduction costs. If creating another copy is free, your labor remains the same while your distribution grows.

Tech companies take advantage of this moat more than any other. When I draft an email for my weekly newsletter, I do the same amount of work if I send that email to one person (which was actually the case when I started) as I do now to the thousand+ people on my email list.

If Joe Rogan records a podcast episode, he does the same amount of work if one person listens to it or if 100 million people listen to it. The same is true for YouTube videos, tweets, software products, etc.

No matter how many people consume it, you’ve done the same amount of work.

Low-Cost Producer Moat

When a business can create a product for a lower price than any other company, it has a low-cost producer moat. These companies generally leverage economies of scale to keep their costs low, as well as zero marginal cost of reproduction.

Switching Moat

Alphabet’s G-Suite (Gmail, Google docs, etc.) is a good example of a switching moat. You could change providers for collaboration tools (Slack is trying pretty hard to usurp Gmail chat), but it’s a hassle and you’ve likely been with Google forever.

That’s a switching moat: a business provides a service that gets so deep into your daily life that it becomes a hassle to change over.

Monopoly Moat

A business that has a monopoly moat is the only provider of a service.

Your natural gas company is a good example. You can’t get natural gas to your house or apartment from any other company, so this particular company gets your business. The same goes for electricity companies and railway services.

Personal Moats

Moats don’t have to be just unique to companies. You can also have a personal moat as an individual.

One personal moat I have is the ability to delay gratification by focusing on one task over a long period. It’s how I built this blog, and it’s the heart of my investing approach.