It’s how I built this blog, and it’s the heart of my investing approach. 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.

What Benefits Do Economic Moats Provide?

This means that the company remains a dominant force in the marketplace and retains its market share. Being able to maintain or widen a moat can also increase a company’s brand value. This is very important for companies that are heavily invested in a brand, such as Apple’s iPhones. This time, your competitors will have no way of duplicating your methods, as your competitive advantage is protected by your patent. In this example, your economic moat is the patent that you hold on your proprietary technology.

Unit Economics

1. If a company consistently has a better margin profile than the rest of the market, then this is typically one of the first signs of an economic moat.
2. Just because a company has high margins does not signify a moat, because there must also be an identifiable, unique advantage.
3. A company that exists in a business where the startup costs are prohibitive for small entrants would also have a wide moat.
4. I often look at moats as lock-in effects of your clients, in other words, protectors and drivers of customer retention (look at this post on the topic).

No matter how many people consume it, you’ve done the same amount of work. An intrinsic characteristic is one that is at the very core of the business. Blackberry’s moat was that it was a smartphone specifically designed for the enterprise customer. From email to security it became a standard issue for the increasingly mobile professional who needed more than a Nokia (at the time) to properly keep on top of their workloads. Facebook competes with Google in some areas (such as a search and video resource), but lacks enterprise cloud and business features. Twitch has eaten away a chunk of YouTube’s prominence in some areas, but the deeper search functions on YouTube make it a better broad entertainment platform.

While the industry may see new competitors emerge, Zomato’s advantage lies in having a larger what is a moat market share compared to its closest competitor, Swiggy. This advantage serves as Zomato’s moat, making it challenging for competitors to overtake its position. In other words, there must be a unique value proposition and/or a strong reason behind the durability of the future profits (e.g. cost advantages, patents, proprietary technology, network effects, branding).

Economic Moat

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. A business has a network effect moat when each new user adds value to the existing users. Learn about Antler and get additional insights on building early-stage companies. Oscar is an entrepreneur, expansion specialist and leader with 10 years’ experience in building ventures.

Understanding Wide Economic Moats

Starbucks is a great example of a cultural moat, a brand built by upgrading something as simple as coffee by giving it the right cultural expression. The simple act of ordering by name (which the founder explicitly noticed in his European business trips) gave it a degree of familiarity that wasn’t very present before within cafes. Another moat that it created is the Starbucks rewards membership program which, a few years ago, allowed its members to use the Starbucks app to order, pick up and pay.

For example, a business that holds an exclusive patent for the creation of a miracle drug would effectively keep potential competitors out of its business. Having few or no competitors would allow the company to continually generate high levels of profit. It extended the geographic reach of its app as more drivers signed up, thus reducing wait time for pickups and providing access to newer areas. It also developed a model which is now known as surge pricing, to ensure that a ride was always available whenever a potential user opened the app.

1. This extended contract duration provides Page Industries with a massive competitive advantage, acting as a moat that protects its market position.
2. “Each step in Apple’s course of conduct built and reinforced the moat around its smartphone monopoly,” prosecutors wrote in Thursday’s lawsuit.
3. Everyone in the venture world has been waiting for months for the re-opening of the IPO window.
4. It is a weaker moat as it is only a matter of time until competitors enter the space if it is a lasting opportunity.
5. Therefore, in a short period of time, your large profits would erode, and the local lemonade industry would return to normal conditions again.
6. Like many of the other castles on the list, it has secret passages, a drawbridge and moat, a chapel and a torture chamber — but this Napa Valley castle offers wine tastings as well as tours.

Sanrio has rivals (such as San-X), and there is nothing about its merchandise and products that can’t be freely replicated by those rivals. Google’s depth of data, across its broad suite of technology services (including e-mail, search, YouTube, analytics and more) allow it to provide a service so superior that its brand name has become iconic to the Internet. This allows it to weather the storm of far more focused brands that attack part of its moat. These are just five of the main forms of moats that you’ll see in the market.

The term was popularized by Warren Buffett and is derived from the water-filled moats that surrounded medieval castles. Wide economic moats can be caused by several factors, including high barriers to entry. When evaluating stocks, it is essential to consider the concept of a moat, which refers to the competitive advantage that a company possesses over its rivals. A strong moat acts as a barrier, protecting a company’s market position and enabling it to sustain its profitability over an extended period. Conducting a moat analysis helps investors identify companies with sustainable competitive advantages, which can be a significant factor in determining long-term investment potential.

While it certainly has it advantages, there are certain drawbacks to having an economic moat. First, it creates high expectations from customers, especially when it comes to pricing and delivery times. It also means that the quality of a company’s goods and services must meet the demands of consumers.

However, it remains true that if there is inconvenience or cost involved in moving off your technology or service, you’ve got a business moat. Companies have several ways they can establish (wide) economic moats to retain market share. This may make it difficult for the competition to steal customers and eat away at revenue. As with any investment, a thorough understanding of the fund’s strategy and a long-term perspective is crucial for making informed decisions in the dynamic world of equity investments. The introduction of the Bajaj Finserv Large and Mid Cap Fund with a moat-based investing strategy marks a notable addition to the investment landscape. Economic moat-based investing brings a distinctive perspective to large and mid-cap funds, offering potential benefits such as risk mitigation, focus on quality, and the potential for sustained growth.

European colonists in the Americas often built dry ditches surrounding forts built to protect important landmarks, harbours or cities (e.g. Fort Jay on Governors Island in New York Harbor). However, suppose you develop and patent a juicing technology that allows you to get 30% more juice out of the average lemon. This would have the same effect of reducing your average cost per glass of lemonade. Suppose you have decided to make your fortune by running a lemonade stand. You realize that if you buy your lemons in bulk once a week instead of every morning, you can reduce your expenses by 30%, allowing you to undercut the prices of competing lemonade stands.