Software Growth

Moat

A moat is a durable competitive advantage that stops rivals from copying your product and competing away your profits, such as scale, brand or lock-in.

A moat is whatever keeps competitors from taking your customers and your margins. The term comes from investor Warren Buffett's "economic moat", a picture of a castle protected by water. In software, features are easy to copy, so the question every founder gets asked, "what stops someone from building this?", is really a question about your moat.

Advantage versus moat

Jason Cohen makes the key distinction in his essay on moats: a competitive advantage is not enough, it has to be durable. His reasoning is that industries commoditize over time, delivering similar products at similar prices and low profit, and moats are the antidote. He illustrates with Snapchat Stories, which Facebook and Instagram copied quickly, so a feature lead alone did not keep Snapchat's market share (A Smart Bear). Being first, being fast or having a good product is an advantage. It becomes a moat only when copying it is slow, costly or unattractive for others.

Types of moat

Cohen draws on a taxonomy by Jerry Neumann. The categories he names include:

  • Economies of scale and speed of innovation: costs fall as you grow, or you ship faster than anyone.
  • Complementary assets: an ecosystem of partners and tools that support your product.
  • Learning curve: accumulated experience that others cannot buy.
  • Brand: the default name in the category.
  • Switching costs: integrations and lock-in that make leaving expensive. See switching costs.

His main example is Amazon Web Services, which stays profitable despite commoditized infrastructure by combining several moats at once: fast innovation, the largest ecosystem, operational maturity, brand leadership and broad services that lock customers in.

NFX adds another one that is especially strong in software: network effects, which it describes as the strongest of four remaining digital defensibilities alongside brand, embedding and scale (NFX). Hamilton Helmer's 7 Powers frames the same question as "power": the conditions that create the potential for persistent differential returns.

Moats do not appear by accident

Cohen stresses that moats come from deliberate multi-year investment, and that strategy means naming which moats you will build and the specific costly activities required. A moat that sounds good in a pitch deck but has no budget or roadmap behind it is not one.

What a small SaaS can do

Early, you will not have scale, a brand or a network. You can still build smaller defenses:

  1. Depth in a niche. Cohen argues in a separate essay that startups beat incumbents by doing things the incumbent cannot or will not do, such as serving markets too small for a large company, offering personal support and iterating quickly (A Smart Bear).
  2. Integrations and workflow fit that raise the cost of leaving.
  3. Proprietary data that improves with use.
  4. Trust and support. Customers who love you will pay more and forgive more.
  5. A focused position that bigger rivals cannot adopt without upsetting their own customers.

Common mistakes

  • Calling a head start a moat. Head starts erode.
  • Counting patents or "AI" as a moat without a mechanism that stops others copying.
  • Building lock-in that angers customers. Hostile vendor lock-in creates churn the moment a good alternative appears.

A simple test: if a competitor with ten times your budget copied your product tomorrow, what would still make customers stay? That answer is your moat.

Related terms

Sources

Back to the SaaS glossary