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.

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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

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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:

1. 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.

2. 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.

3. 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?

4. Switching Costs

A product / service ecosystem created which if customers leave, they are at overall loss than gain. In simple words, make it really painful for customers to leave you and try an alternative. Here are some examples of how companies create high switching costs:

• Free software to universities (so students learn it and hard to move to another tool)

• SAP accounting systems once adopted incur a huge cost to company to move to another

• Salesforce CRM - high training cost - harder to move to alternative

• Apple ecosystem > Android Ecosystem

…and many examples. If you were to move your organization IT infrastructure to a provider, you would rather choose something safe such as Microsoft. Nobody ever got fired for hiring Microsoft.

5. Branding

Branding Moat is where a product enjoys higher perceived value even though it provides similar features and functionalities as others in the market. When a brand is powerful, the aspiration to possess it is strong and consumer is ready to pay extra to own it.

As an example, Tiffany’s is a luxury jewelry brand , to an extent that the second hand boxes of Tiffany & Co sell on eBay.

Other examples of powerful brands

• For software developers, Stripe has a cult following because of its deep documentation, great content organization and meaningful design. The company’s leadership is still evaluated on their ability to create great documents and it still responds to developers facing issue in integrating Stripe.

• Slack is another powerful brand that now takes precedence over Microsoft when it comes to team-based communication (specially in startups and high growth companies)

6. Cornered resource

When a business has preferential access to a valuable and scarce resource, it can mean a great advantage over others in the ecosystem. The scarce resource can mean many different things:

• Talent (Snowflake hired probably 5 of the world’s 20 database experts build it from scratch)

• Industry standards (Autodesk Revit, which controls half the market because it is the industry standard among architects.)

• Regulations (Example: San Francisco banned electric scooters in order to formally determine which limited scooter vendors they would allow in the city.)

7. Process Power

Creating operational excellence that is hard to replicate as it needs complex coordination of multiple parts of the organization.

How work improvements work their way up the organization chart isn’t happenstance. Toyota has explicit management processes for it. Toyota defines standard procedures for how to execute work as a baseline for improvement and to ensure organizational goals are implanted in the front lines, where the real work of the organization takes place. When front-line workers spot a work problem, they have a clear way to suggest improvements. Their idea goes through a quality circle of peer workers, which then must be approved by their manager. Upper-level managers view the ideas, then take action. This is a bottom-up, not top down, system.

Source (HBR)

While above are pretty standard business moats (made famous by 7 Powers book by Hamilton Helmer. You can also utilise the 7 powers and find which of the moats does your organization have or lacks:

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→ Download 7 Powers by Hamilton Helmer, 5 Porter Forces, 10 Modern Tech Moats Excel Template

But the world has changed. How?

Previous era was single dimensional in the sense of optionalities available as a business. Now there are multiple options in the playbook for every business aspect:

Source: Battery Ventures Software 2021 Report

Take for example, the process power moat (from previous section) - the traditional definition is simply about operational excellence. However, in the modern tech world, this moat takes completely new definition.

The best way to see the difference is Nokia’s market share decline in the smartphone world. Nokia went from >50% market share to <10%. Nokia did well on ability to handle hardware and related pivots, but smartphones increasingly became about both software and hardware, more precisely how software performs on hardware (this is the process power in the modern tech). Companies like Apply accelerated their chip performance faster and eventually outdid smartphone experience of others.

Moats for the modern tech world

People often look for an answer to that question in the form of a monolithic, singular technology, like a single algorithm, or a particular piece of code nobody else can replicate, or a branded Whiz-Bang Platform. But, more often, technical moats take the form of many, many incremental improvements to one basic idea.

In the long-term, all technology becomes commoditized. All tech moats are temporary, because the tide of technology is always rising. So the question becomes: what is hard to replicate in the short and medium term?

This is especially true for software companies in 2021, with such an enormous open source ecosystem to build on. You probably aren’t building a unique new machine learning algorithm or a shiny new datastore, because in all likelihood you don’t have to. (Source: Airplane.dev)

1. Data Advantage: Companies that collect and analyze vast amounts of data can gain insights that lead to better product development, customer understanding, and operational efficiency. This advantage can be difficult for competitors to replicate.

   

2. Technological Expertise: Deep knowledge and expertise in a specific technology or domain can provide a significant advantage. This expertise can lead to the development of innovative and superior products that are hard to replicate by competitors.

   

3. Continuous Innovation: Companies that maintain a culture of innovation and have a track record of launching successful products can establish a reputation for being at the forefront of technology. This can create a competitive advantage and customer preference for their offerings.

   

   4. Reduced Time and Effort: High-tech companies that provide products with easy integration and a user-friendly interface save customers significant time and effort. By eliminating complex setup processes or extensive training requirements, these companies can attract customers who value a quick and hassle-free implementation.

   

   5. Rapid Deployment: Companies that offer products with fast deployment capabilities can gain an edge over competitors. The ability to integrate and start using a product promptly allows customers to realize the benefits and value of the solution without delays. This can be especially appealing in time-sensitive industries or situations where immediate results are desired.

   

   6. Seamless Compatibility: High-tech companies that prioritize compatibility and interoperability with existing systems, platforms, or software used by customers can differentiate themselves. By seamlessly integrating with established infrastructure, their products can be readily adopted without disrupting existing workflows or requiring major system overhauls.

   

   7. Out-of-the-Box Functionality: Products that offer comprehensive out-of-the-box functionality, requiring minimal customization or additional configuration, can provide a competitive advantage. Customers can start utilizing the product immediately without the need for extensive customization or development, accelerating their time to value.

   

   8. User-Friendly Interface: Intuitive user interfaces and clear documentation can significantly enhance the ease of integration and product adoption. High-tech companies that invest in designing user-friendly interfaces and provide accessible support resources can make it easier for customers to start using their products quickly and effectively.

   

   9. Customer Onboarding and Support: Providing robust onboarding processes, training materials, and responsive customer support can contribute to a faster integration and product adoption experience. When customers feel supported throughout the integration process, they are more likely to choose a product that allows them to start using it immediately.

   

   10. Data Infrastructure Moat: Heap started from a product that cost almost 100% of their revenues to deliver and iterated their way to a product that cost below 20% a few years ago (Source: Airplane.dev)

The graph below also shows the size of customer Heap could safely support, at different points in time from 2017 to 2019. This took years of iteration to get to the point where Heap could serve customers doing hundreds of millions of events per month.

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To work on 7 traditional business moat, 5 Porter Forces and 9 modern tech moats, download the Workbook:

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Example of tech companies that demonstrate modern moats

Certainly! Here are examples of high-tech companies that leverage the ability to integrate quickly and start using their products immediately as a competitive advantage:

1. Slack (now part of Salesforce): Slack is a popular team collaboration platform that prioritizes ease of integration and quick onboarding. It offers a wide range of integrations with other tools and platforms commonly used by businesses, such as Google Drive, Trello, and Salesforce. By seamlessly integrating with existing workflows and providing intuitive user interfaces, Slack allows teams to start communicating and collaborating effectively without significant setup time.

2. Shopify: Shopify is an e-commerce platform that enables businesses to set up and manage their online stores quickly. It offers a user-friendly interface, pre-designed templates, and a robust app store with various integrations for payment gateways, shipping providers, and marketing tools. Shopify's emphasis on easy integration and seamless onboarding allows businesses to start selling products online rapidly and efficiently.

3. Zoom: Zoom is a leading video conferencing platform that gained significant popularity, particularly during the COVID-19 pandemic. Zoom's success can be attributed, in part, to its quick and straightforward integration process. Users can join meetings with a single click, and the platform offers integrations with calendar applications like Google Calendar and Microsoft Outlook, making it easy to schedule and join meetings seamlessly.

4. Salesforce: Salesforce is a customer relationship management (CRM) platform that emphasizes easy integration with various business systems. It offers a robust set of APIs, pre-built connectors, and a vast ecosystem of third-party applications that allow businesses to integrate Salesforce with their existing tools and databases. This enables companies to start leveraging the CRM capabilities of Salesforce quickly and efficiently, improving their sales and customer management processes.

5. Trello (now part of Atlassian): Trello is a project management and collaboration tool known for its simplicity and ease of use. It provides an intuitive interface with drag-and-drop functionality and offers integrations with popular tools like Google Drive, Slack, and Jira. Trello's focus on seamless integration allows teams to start organizing and managing their projects immediately, without the need for extensive training or complex setup.

Generative AI as a way to accelerate product development and processes

1. Product Development: Generative AI algorithms can be employed to generate novel and creative product ideas, designs, or features. By training AI models on large datasets and leveraging techniques like generative adversarial networks (GANs) or variational autoencoders (VAEs), companies can generate unique concepts and prototypes that can set them apart from competitors. This allows for a continuous stream of innovative ideas that keep the company at the forefront of technology.

2. Personalization and Recommendation Systems: Generative AI can power recommendation engines and personalization systems, tailoring products and services to individual customer preferences. By analyzing user behavior, preferences, and historical data, companies can use generative models to generate personalized content, product recommendations, or user experiences. This enhances customer satisfaction, engagement, and loyalty, creating a competitive advantage.

3. Content Generation: Generative AI models can be employed to automate content creation processes, such as generating written articles, product descriptions, or marketing materials. This can significantly speed up content production, reduce costs, and maintain a consistent flow of engaging and relevant content. By leveraging generative AI in content generation, companies can stay ahead in content marketing efforts.

4. Process Optimization: Generative AI techniques can be applied to optimize internal processes and operations. For example, companies can use AI-powered algorithms to generate optimized production schedules, supply chain routes, or resource allocations. By continuously refining and improving these processes through generative AI, companies can achieve higher efficiency, cost savings, and operational excellence.

5. User Experience Enhancement: Generative AI can contribute to enhancing user experiences by creating realistic simulations or immersive environments. Companies can use AI-driven virtual reality (VR) or augmented reality (AR) to provide users with interactive and engaging experiences that go beyond traditional interfaces. By leveraging generative AI in user experience design, companies can differentiate themselves and deliver unique and memorable interactions.