Starting a business is definitely tough, but many would argue keeping it competitive over a long period of time is even more challenging.
That's where having a moat comes in handy.
"The Moat"--also called an "economic moat" or "barrier to entry"--is the competitive advantage your company has over others in the same industry. As Warren Buffet, who coined the term, once said, "I don't want a business that's easy for competitors. I want a business with a moat around it. I want a very valuable castle in the middle."
So how exactly do you get that castle and its accompanying body of water? A well-known figure in business software, Mark Roberge, had a lot to say on the matter when we spoke a while back.
As the former Hubspot executive, who now lectures at Harvard Business School, explained it, building the moat is a crucial step for businesses--one that's often overlooked or sacrificed in the name of revenue generation. Roberge has seen a lot of companies with excellent product market fit scale up, then go sideways, losing their hold on an industry to others offering a similar product or service.
But there are ways to avoid that situation. You just have to you have to figure out what it is that's unique enough about your business to make you win even--and especially--when copycats try to undercut your business.
Here are a few tips, based on my conversation with Roberge.
1. Focus on network effect.
While there are different types of moats out there, if you're in a business-to-business setting, "network effect" is probably what you'll need to focus on most, according to Roberge.
Network effect is simply the idea that a product or service becomes more valuable the more people use it. Classic examples are companies like eBay or Amazon, both of whom are so prevalent now it's hard to imagine a world without either of them.
In a business-to-business context, a company like Slack has excellent network effect. Slack is hardly the only collaboration tool out there for businesses; a company could switch services at any time. However, as Roberge says, "it's really hard to do that when 80 percent of your company is already set up in groups and that's worked in [to your company]."
In other words, by switching services, you would be taking yourself out of the conversation. Another good example of this is LinkedIn. Every now and then I get invites for other professional social networking sites; so far none of these so-called competitors has been able to command the kind of presence LinkedIn has. If an individual or business were to leave the latter for the former, they would find it much more difficult to maintain a large professional network.
2. Make customer success a key to your moat strategy.
"It's really hard to do because the moat development can come at the sacrifice of maximum revenue generation, but I think it's a really important step," says Roberge of building a moat for your company.
One of the reasons The Moat is so important for businesses today is that we've left the era of "shelfware," a standard in the old days of business. A buyer typically had no other choice than to purchase unwanted resources along with the ones they would actually use. And typically, businesses were locked into contracts over long periods of time.
In today's era of Software-as-a-Service business models, an unhappy customer can abandon your business almost anytime they want, then take to social media and peer review sites to explain what made them so unhappy. Given those factors, it's just inherently easier for a competitor to swoop in with a better deal--cheaper, better performance, etc.--and supplant your hold on an industry.
This is why a huge part of building a wide moat involves prioritizing your customers. "People over-obsess on revenue generation and profitability prematurely, and they undervalue customer success," says Roberge. "This point I've seen to be important in this day and age because of the empowerment today's buyers have with the internet and social media."
Consider what your customers care about most before making changes and updates to your business. For example, many value low cost when it comes to software, but some put more importance on ease of use. You learn such things by building strong relationships with your customers and investing in their needs. It's all about pausing to understand the other person's point of view, which in turn makes your Moat that much wider.
3. Make bold moves.
The Moat is all about safeguarding your business, but that doesn't mean you shouldn't take chances. In fact, chances are often what will strengthen your Moat rather than destroy it, as many fear.
Roberge points to his former employer Hubspot as an example. "Marketing automation" as a field was just two years in development, when Hubspot came out. So it would have been really easy for the founders to simply call themselves, in Roberge's words, "an iteration on the marketing automation vendors." Instead, the three-person startup invented an entirely new phrase called "inbound marketing."
Roberge notes that it was "a really big undertaking as a small, seed-funded startup, but if [something like that] takes off, it creates great defensibility and moat." And sure enough, when the copycats came along, as they always will, Hubspot remained solidly in place as the leader.
By taking a chance and creating a new category, rather than following everyone else, Hubspot wound up owning the category and sitting in the safest place of them all: right in the middle of the most defensible moat around.