The complete guide to product moats for modern tech companies
+Exclusive Downloadable Template. Including 7 traditional business moats (7 Powers by Hamilton Helmer), How to use Generative AI to accelerate product development and process, 10 modern tech moats
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Chances are high that you know or heard about ‘business moats’ - competitive advantages that set you apart from others and lead to sustainable business. Some of us learnt different kind of moats while doing business, while building products or learnt about them at university.
But we are at an inflection point today, the ease of technology adoption to deliver value has made it harder to achieve moats or commoditized some of them on the other end of the spectrum.
In today’s publication, we analyze the traditional business moats with examples (and templates for you to download), but also dive into modern tech moats that are must-know if you’re building modern software to delivery products.
Today’s publication includes:
Partial access for free subscribers:
Primer on traditional business moats (total 7 moats)
Only for paid subscribers:
Product moats for modern tech companies (total 10 moats)
Using Generative AI to improve product development and growth
Download Excel Workbook on : 7 traditional business moats, 5 Porter Forces and 10 modern tech moats
Primer on traditional business moats
When it comes to existing business knowledge that has been taught in last decade, it is possible to summarize all business into following moats:
Scale Economies
As the organization volume scales, the per unit costs decline. This is pretty much has become the common sense of business world. The organizations with this moat have been more aggressive w.r.t intensity of cost decline relative to increase in volume, as compared to others in the ecosystem.
Take, for example Netflix subscriber base today is >210M while Stan has 2.5M subscribers (Nine’s streaming platform). If both of them spend $100M on original content production, then cost per subscriber for Netflix will be 0.47c and for Stan it will be $40. The per unit cost is a nice moat to consider, but makes little sense if the final product is not providing value to consumers. Here we assume Netflix content will continue to be more entertaining than Stan’s. Subscriber base retention and pricing strategy is also important to consider besides per unit cost. You get the drill.
Network Economies
The value of the product or service goes up for a user as the customer-base/user-base increases. This allows companies to charge higher or do better monetization with user base, as users are less likely to churn due to network effects. It also makes competitors harder to enter the market since it needs similar network effects on its end to attract users.
Counter Positioning
A business gains counter positioning moat when it adopts a business model that existing players cannot mimic due to the risk of them ending up cannibalizing their own existing business. This moat can be made better understood if we add the disruptive innovation model by Clayton Christensen to the mix.
Disruptive innovations tend to be produced by outsiders and entrepreneurs in startups, rather than existing market-leading companies. The business environment of market leaders does not allow them to pursue disruptive innovations when they first arise, because they are not profitable enough at first and because their development can take scarce resources away from sustaining innovations (which are needed to compete against current competition). So market-leading companies continue to prefer sustained incremental innovations rather than disrupting their own business models.
Take the Kodak example. Kodak relied for their revenues on having traditional films and photos developed. Despite inventing one of the first digital cameras in 1975, Kodak remained invested in traditional film until much later.
Kodak’s leadership probably knew the coming of digital, but it was a difficult question for them to ask: Would you utilize the cash generated and put it into something entirely new and bettable, while letting go of some short-term profits?