What is moat

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This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Love words? Need even more definitions? Homophones, Homographs, and Homonyms The same, but different. Merriam-Webster's Words of the Week - Nov. Ask the Editors 'Everyday' vs. What Is 'Semantic Bleaching'?

How 'literally' can mean "figuratively". Literally How to use a word that literally drives some pe Is Singular 'They' a Better Choice? The awkward case of 'his or her'. Take the quiz. Our Favorite New Words How many do you know? That brought drivers — some of whom worked simultaneously for other services — back to Uber, where they could make more money.

It also brought customers, who could easily use either service, back as well. That strategy has been less effective against Lyft , which has become increasingly able to offer similar incentives within its marketplace, competing with Uber on price and driver availability. Ultimately, to win against Lyft, Uber is betting not only on its marketplace moat, but also reinvesting in its brand, hoping that its familiarity can give it an edge in a newly commodified rideshare industry.

It is also investing in various other services and verticals including, such as freight shipping and food delivery. Airbnb harnesses the power of marketplace network effects by bringing together 4M hosts and tens of millions of guests. Each new guest provides more business to the hosts and increases the incentive to list rentals. And as more hosts join the marketplace, they enhance the value of the system by providing travelers with more options to choose from and places to visit.

Both groups are incentivized to stick with Airbnb. Positive experiences with Airbnb hosts keep guests using the platform for future trips, while accrued positive reviews help hosts attract more customers. And with millions of users interacting on its platform, the company is able to gather valuable data. These insights then help the company to refine its products and deepen its relationship with users. In May , for instance, Airbnb laid off a quarter of its staff in a bid to cut costs amid the Covid pandemic.

And Airbnb was perfectly positioned to profit from this demand. Guests were able to choose from a wide range of options and booked for weeks and even months at a time. This boom in business allowed Airbnb to recover enough to even go public in December This relatively simple difference quickly made Google the dominant internet search engine. Another factor that makes Google attractive for advertisers is that so many searches are made with the intent to buy a good or service.

In , Google has about a The company also leverages its ability to constantly acquire new data about what people are searching for to improve search and build further moats in areas like transportation and shopping. The most powerful differentiator for Google here is that the company can pair search information with other data sources it has access to, like mobile location data from the Google app. The result is a layering of value. When a user encounters a speed trap or slowdown, that information can then be transmitted to every other user of the app, making the experience better for everyone.

This personalization makes users less likely to want to give up that convenience and go to another provider. Today, for example, more product searches begin on Amazon than do on Google. The durability and stickiness of the Apple ecosystem comes down largely to iOS and the ways that it incentivizes users to stick around.

A first major lever that Apple used to keep people in its ecosystem was iTunes. The offering kept users around by becoming their definitive system for digital music, as music bought on iTunes could only be listened to on iTunes. Another level was iCloud, which became the clearinghouse for all personal data. On the hardware side, there are products like Apple TV and AirPods, which become more valuable when you have an iOS product to connect them to.

Every new product and service in the Apple ecosystem is designed to drive value for people using iOS and reinforce the value of staying inside the ecosystem. The result has been a significant diversification in the products that Apple sells in large numbers.

The more friends a user had on Facebook, the more value the user could get out of it. But Facebook layered more and more value on top of this simple social register over time, and because it controlled all the data, the company gained control of a deep moat built on network effects.

The first big feature Facebook added to its platform was Photos, which instantly became a powerful growth mechanism because of its tagging functionality. Every time a user uploaded a new photo and tagged their friends, those people were notified about it. Not only did these notifications drive users to Facebook to see photos; it also taught new users how to use Facebook. Meanwhile, getting that notification teaches you that tagging photos is possible.

Instead of Facebook explaining that you should upload photos and tag people, they just showed you. They created new triggers to bring new people into the Facebook ecosystem, such as receiving an invite to a private group or receiving a message request.

Instead of having to build a new product from scratch, Facebook can use its social graph to compete with virtually anyone — for example, by immediately releasing copycat features like Instagram Stories to a bigger base of users than Snapchat had overall.

The moat has electric vehicles at its core. But the company has also built advanced software, offers a charging network, and sells complementary products like in-home energy storage and solar roofs. For instance, Tesla has also built over 25, supercharger stations around the world that Morgan Stanley analyst Adam Jonas considers as a major strategic asset:.

Tesla sees electric vehicles as a platform consisting of car buyers and rapid-charging stations. Selling electric cars only makes sense if drivers can charge them easily, but investing in a charging network is financially viable only with a large enough base of electric vehicles.

Tesla is tackling this riddle by building both the cars and the network at the same time. Other carmakers have taken a different approach. This fast-charging network is intended to serve electric vehicles in Europe but currently operates only a few hundred stations. Tesla is ahead of the competition in other areas as well. Tesla pioneered over-the-air OTA software updates that can improve range, braking, power, and driver-assistance capabilities.

The company also provides solar roofs, solar panels, and Powerwall home batteries. Musk is also keen on using his portfolio of other businesses to promote Tesla cars. For instance, SpaceX sent a Tesla Roadster into deep space as part of a demonstration for its Falcon Heavy rocket in The stunt is still generating headlines, such as when the car passed by Mars in October Both of these futuristic companies are frequently covered by the media and generate buzz on social platforms.

Many of the biggest and most durable business moats in history have been built on an advantage related to cost. Companies with an advantage on cost can generate several types of business moats, differentiated mainly by different approaches to consumer psychology.

Switching cost moats exist when a company sells a product its users need or trust too much to switch providers. A company with a switching cost moat can drive its prices and profits upward as long as the cost to the customer does not exceed the cost of switching to a competing provider. Even in cases where the cost does exceed the cost of switching, stickiness especially in enterprise products can help defend the moat. Sunk cost moats operate by eliciting a significant one-time or repeating payment from a customer, the size of which is big enough to dissuade that customer from leaving for a competitor later.

Cost advantage moats exist when companies build more efficient manufacturing or distribution and use that to offer lower prices than competitors. The power of this type of moat depends largely on how well those costs come down with scale. If a company can continually lower prices as they grow, it can create a self-perpetuating circle of massive growth.

For more than 50 years, IBM held a competitive advantage built on fear. But it took time for the company to find the stability that would allow it to sell itself as the most reliable vendor in computing. First, IBM had to invent a mainframe that would make it cost-effective for companies to stick with it over long periods of time. Either one would have required users to rewrite all their software. This was a massive problem for IBM from a business point of view, because it meant the company would have to prove itself again with each new iteration of computers that it manufactured.

Customers could easily decide defect to a different mainframe provider, since buying a new IBM mainframe and going elsewhere cost the same amount of money. To change that, IBM set out on a multi-year project to build a new, interoperable base mainframe — something that customers could upgrade to without having to rewrite all their software.

Later, IBM could release updates onto that mainframe, allowing their customers to add more processing power without having to buy a whole new machine.

A month after release, more than , were purchased around the world. Suddenly, choosing — and staying with — IBM became the logical decision for data centers and purchasing departments around the world.

Salespeople would explain to leads that they would never be criticized or questioned for sticking with IBM, and that their other peripherals and equipment might not work with a non-IBM mainframe. This strategy drove customers away from competitors and back to IBM. But none of it would ever have been possible if IBM had continued playing the same game it was playing in the early s, competing with other manufacturers to build the best possible mainframe with each new release cycle.

Automatic Data Processing ADP is one of the largest human resource management companies in the world, with over , clients around the world. It also has a deep switching cost moat that has given it a highly privileged position in its market. ADP has become indispensable to thousands of businesses around the world mainly because it handles two of the most mission-critical tasks inside an organization: payroll and taxes.

In addition to handling compliance and reporting, ADP offers various other value-add services like freelancer management , which further embed customers in the ADP ecosystem.

One is that the cost advantage ADP once enjoyed has lessened, with new players like Gusto and Intuit emerging with lower-cost models designed to attract smaller companies and startups to their payroll platforms. Slack uses high switching costs as a competitive moat. Companies rely on Slack to organize internal communications, manage projects, communicate with suppliers or customers, and more.

This range makes switching from Slack to an alternative platform painful. Teams have to sacrifice workflow habits, message history, and chat channels while investing resources in learning a new tool. This increases the threshold for when any potential benefits of changing would outweigh the burden.

Slack is well aware of this competitive moat and is working hard to expand it. Slack has over 2, apps in its App Directory and boasts around , daily active registered developers. These integrations help users create new workflows that make leaving Slack even more challenging. Slack is also building new features to further increase its switching costs and network effects.

For instance, Slack Connect — introduced in June — allows users to collaborate with external organizations through Slack. Companies can bring their supply chain partners, industry peers, and corporate subsidiaries into a single channel to share files, negotiate deals, and make decisions. The more work companies conduct in Slack, the harder it is for them to churn. Tech analyst Ben Thompson points out that:. Slack Connect allows organizations to collaborate on the messaging platform.

Source: Dispatch. Slack will need to maintain and grow its moat as competitors such as Microsoft loom large. When Gillette first started selling its safety razors with disposable blades in , the innovation of replaceable blades immediately made shaving more convenient, eliminating the need to send razor blades for sharpening. A low-margin product is priced low enough to attract as many people as possible, while a high-margin product is priced just high enough to create healthy profits.

Repetition is the key here. After a customer makes the low-margin purchase, they must make the high-margin purchase continuously.

In other words, people who buy cheap Gillette razors tend to keep buying Gillette blades.