How Can I Build a Moat?

As you scale your company, you need to think about how to proactively defend against competition. The more success you have, the more your competitors will grab their battering ram and start storming the castle.

In medieval times, you’d dig a moat to keep enemy armies from getting anywhere near your castle. In business, you think about your economic moat.

The idea of an economic moat was popularized by the business magnate and investor Warren Buffett. It refers to a company’s distinct advantage over its competitors, which allows it to protect its market share and profitability.

This is hugely important in a competitive space because it’s easy to become commoditized if you don’t have some type of differentiation.

In SaaS, I’ve seen four types of moats.

Network effect is when the value of a product or service increases because of the number of users in the network. A network of one telephone isn’t useful. Add a second telephone, and you can call each other. But add a hundred telephones, and the network is suddenly quite valuable.

Network effects are fantastic moats. Think about eBay or Craigs-list, which have huge amounts of sellers and buyers already on their platforms. It’s difficult to compete with them because everyone’s already there.

In SaaS—particularly in bootstrapped SaaS companies—the network effect moat comes not from users, but integrations.

Zapier is the prototypical example of this. It’s a juggernaut, and not only because it’s integrated with over 3,000 apps. It has widened its moat with nonpublic API integrations, meaning that if you want to compete with it, you have to go to that other company and get their internal development team to build an API for you.

That’s a huge hill to climb if you want to launch a Zapier competitor.

Every integration a customer activates in your product, especially if it puts more of their data into your database, is another reason for them not to switch to a competitor.

When we talk about your brand, we’re not talking about your color scheme or logo. Your brand is your reputation—it’s what people say about your company when you’re not around.

Having a strong brand means you’re in a lot of conversations. When people discuss options, you’re in the mix. People are talking about your product on their podcasts and forums and to their colleagues. You’ve developed a reputation for reliability and innovation, or maybe you’ve become known for solving a unique problem.

Once people recognize and trust your name, you become a brand rather than a commodity. Instead of comparing your pricing and features to everyone else, prospects will start looking at you as a unique offering, even if your features are mostly equivalent to a competitor.

There are hundreds of CRMs, but I bet if you and I sat down and tried to name every one we could think of, we’d top out at maybe a half dozen. Those are the ones with strong brands. It’s a significant advantage.

Maybe your digital asset management software could work for anyone, but if you decide to focus your product on museums and make sure it talks to the collections management tools they’re already using—and that your marketing and website are speaking the language of that world—you may be able to build a brand moat around a segment of the market that can be tough for competitors to cross.

Positioning is a book in and of itself, so I’ll point you to Obviously Awesome by April Dunford as one of the best positioning books for SaaS companies.

A friend of mine owns a SaaS company that’s competing in a massively crowded space. His product gets 500,000 unique visitors a month because he’s exceptional at search engine optimization (SEO), and his company ranks on the first page of Google for many high-volume terms.

He owns these organic traffic channels in his market, so even though other names on those pages might be more recognizable, he can stay highly competitive.

Even if you own a high-traffic search term on Google, Amazon, or the WordPress plugin store, you can have a pretty commoditized product that can still succeed.

One caveat is that this moat can be a bit dicey to maintain because the algorithms at any of those companies can change quickly—and have. Google’s many updates have tanked businesses overnight that depended solely on SEO-driven traffic.

Products that require a significant amount of work to migrate away are said to have high switching costs. High switching costs reduce your churn and create a moat that keeps customers from switching to a competitor simply because that competitor is newer, cheaper, or even builds a better product.

Most APIs are difficult to leave because to do so requires expensive developer time to integrate with a new product. Companies like Stripe, Twilio, and SendGrid have a pretty hefty switching cost moat.

Tools like Slack are difficult to switch from because of the need to obtain buy-in from every manager in an organization. Also, because of the high number of integrations pushing data, Slack requires effort to recreate.

Tools with low switching costs are those in which history is mostly irrelevant, and the time it takes to recreate something you’ve built in the tool is low or nonexistent.

For example, a social media scheduling tool is easy to switch from because there is no critical history stored or complex workflows that need to be recreated using a new tool.

Likewise, one-click SaaS analytics tools that tie into your Stripe account are relatively easy to switch from because they are “one-click easy” to set up.

As makers, we want to believe that features are what differentiate us. After all, we’ve spent hours building and perfecting those features. That’s worth something, right?

Don’t get me wrong. Unique features are a fantastic differentiator—for a few months, until a competitor duplicates them.

You can create a brand around continuously building and shipping innovative features, especially when your competitors are legacy companies who don’t have your feature velocity. Believing these features in and of themselves are a moat, though, is a trap.

By definition, a moat should endure; it should sustain itself and grow stronger as your business grows. If you’re relying on a constant stream of new features to differentiate you, you don’t have a moat. You have a hamster wheel of features.

You can absolutely find growth that way. But realize you’ll also want to focus on some of the other, more enduring, moats.