2 weeks What are the most important economic moats? Reddit     

Hi,

One of the most important things I look for when analysing potential investments is whether or not the company has a strong economic moat. An economic moat gives a company a distinct advantage over its competitors, allowing it to protect and increase market share and revenue.

I’m putting together a list of the most ‘valuable’ types of moats to look out for when analysing companies. Also trying to focus on more “under-appreciated” moats that investors often miss.

Would love to hear if anyone has any suggestions on types of moats that could be added to the list???

Here’s the list so far, would love your feedback:

(note: I focus on investing in tech companies so this list kind of reflects that)

Traditional Business Moats

  • Technology: Sometimes, companies can build a massive economic moat by having deep technology that is at least 10 times better than the competition. Google’s search engine is the classic example of this. Google joined the search wars somewhat late but had a solution that was far better than Yahoo’s.
  • Economies of Scale: The bigger your are, the lower your costs will be due to having more operating leverage. This means that you can earn more money per customer (at the same price) or provide a cheaper solution than your smaller competitors. Software companies in general are great examples of economies of scale due to the almost-zero additional cost of production involved in acquiring another customer.
  • Network Effects: Your product/service has network effects if its value increases as the number of people using it increases. Social networks and messaging products are classic examples of network effects. Network moats can be incredibly defensible. Why would I download a new messaging app when all my friends are using WhatsApp?
  • Brand Loyalty: A strong brand can be a moat. Think Apple, Coca-Cola, Gucci. Instantly recognisable brands that have built huge businesses by cultivating brand loyalty amongst their customers.

Under-Appreciated Moats

1. Professional Services:

Professional services typically involve providing hands-on setup, configuration and implementation support to your customers. This helps them to have the best possible experience of your product, suited to their specific needs. Providing professional services can create a unique economic moat for 3 key reasons:

  • Stronger Customer Relationships: By providing hands-on support to your customers, you will build a strong relationship and strong brand loyalty that is very difficult to replicate with “ready-to-go” products.
  • Sunk Costs: The significant cost, time and effort involved in the implementation process will deter your customers from switching to a competitor without a very strong reason.
  • Switching Costs: Providing hands-on support will make it very costly for your customers to move to a competitor. They would have to replicate all of the integrations and configurations that you have helped them setup. While also needing to retrain their staff on a brand new system. Costly indeed.

2. Multi-Product Strategy:

A multi-product strategy is a really powerful way of building a strong moat around your business. Even if the individual products are worse in isolation, the benefits of multi-product may far outweigh the negatives for customers.

For example, a competitor have built a sales analytics tool that is far better than Salesforce’s analytics product. But a large customer is not comparing both analytics tools in isolation. A large customer is comparing your analytics tool against the fact that they can also get their CRM, marketing and customer support software all from Salesforce. One contract. One vendor relationship. One login for employees.

This presents a bit of a chicken/egg problem for competitors. How do you build a wedge into a market like this? It’s not easy. That’s why multi-product is such a compelling moat.

3. Data:

Data has always been a hugely valuable resource for tech companies. Many companies have built huge moats around their customer’s data. Companies like Oracle are essentially databases on which different enterprise applications have been built. Another name for this is a system of record.

The huge emerging opportunity in data lies in doing useful things with that data. It sounds simplistic but many enterprise products are still essentially CRUD applications. They may allow customers to easily access huge amounts of data, but they don’t allow you to do much more than create, read and update that data.

With machine learning, we are starting to see products that do really powerful things with data. For example, People.ai uses ML to help companies uncover new revenue opportunities from their customers. This is just the tip of the iceberg. For example, you can imagine an ML product that make hiring and promotion recommendations based on employee data. Or products that make marketing suggestions based on previous marketing campaigns.

It’s fairly clear that incumbent companies have the upper hand here. A company like Salesforce already has access to customer data. They ‘just’ need to build products that can make intelligent recommendations from this data. This combination (system of record + ML) would be a massively defensible moat. As Salesforce provides better recommendations to its customers, they would be less and less likely to move and store their data somewhere else. A virtuous cycle (for Salesforce).

What do you think of this list so far? What moats should I add to the list? Are there any that I should remove?

Thanks

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