Famed investor Warren Buffet explains that he prefers investing in businesses with a protective “moat” around them. An economic moat is a competitive advantage that a company has over its competitors. A moat protects a company’s market share. A moat also allows a company to defend its profit margin because it has more control over its pricing power.
Big companies build a moat to lock out their competitors by out-slugging them in infrastructure investments to create massive scale. Smaller businesses must be more innovative with limited capital to defend their turf.
1. Get certified
Are you in need of professional, discreet and compassionate crime scene and blood cleanup? Help is just a phone call away. A team of technicians can be at your doorstep in a matter of hours.
That sounds like an episode of Ray Donovan. However, that’s a website description of a Philadelphia-based company. Its owner, Belle, spun this business off from her more traditional junk-hauling and cleanup company after being called in by families to move and remove former possessions of the loved ones they lost.
Belle attained licensure and certification from the Environmental Protection Agency and other bureaus to handle medical and biological waste in residences after murders, suicides and diagnoses of contagious serious sicknesses.
Further, she invests in training, continued education, insurance and special gear and containment equipment. The number of calls requiring Belle’s certification is fewer than the need for junk removal. Still, she’s created a protective moat around that part of her business by securing evidence of a higher level of professionalism and expertise than other companies. As a result, she gets hired more than her less-credentialed competitors and can set her own price.
Is there a certification program that could protect your business from competition looking to take your market share? For example, many people will purchase Fair Trade Certified groceries when offered the choice. Some businesses can secure patents and trademarks to protect intellectual property, products and branding.
Not all moats are dug to protect market share. For instance, some companies maintain a hiring advantage by attracting employees who prefer to work with a B Corp Certification. Other companies compel hires with a curriculum development certification because many workers seek a defined career path.
2. Create an army of defenders
Sometimes, the best defense is a good offense. Yelp is one of the most visited websites on the Internet. In January 2024, Yelp.com received 175 million visits, with an average duration of 6 minutes. People have become fond of giving online reviews, and consumers use them in decision-making.
Rightfully, the Securities and Exchange Commission has stringent rules on how companies under their regulation can conduct business. To some extent, those rules and directives from other governing bodies create a perception of commoditization among financial advisory firms that provide investment and financial planning services. For example, many people can still put “advisor” on their business cards even though they’re de facto financial salespeople by regulation and trade.
In 2020, the SEC modernized its marketing rules, including allowing client testimonials. SEC-regulated financial services companies can now share client comments regarding the service provided. (A word of warning for financial advisors — sharing client comments will likely trigger audits to ensure that you’re not cherry-picking testimonials. You must share the good and the bad.)
While Yelp is the common online review tool for restaurants and retail stores, Google Reviews is used more frequently for professional services. When a prospective client is deciding between two financial advisors, does it seem more prudent to choose between one with a couple of reviews (one of which is a vendor or relative)? Or a team with 50 five-star reviews?
Small businesses can create a moat by identifying and sharing the niche they serve or the solutions they provide for particularly sophisticated problems that others cannot serve as effectively.
3. Get customers to use more of your services
It is valuable to customers to help them access all the benefits you provide. That integration creates switching costs and locks customers into your ecosystem. Switching costs don’t have to be monetary — they could be the time it takes for a transfer, retraining and lost productivity. An integration moat provides companies with pricing power and improves customer retention.
Frank, the president of a publishing company in Springfield, recently switched from an industry-specific Customer Relationship Management (CRM) software to Salesforce. Given Frank’s assessment that Salesforce would serve his company better, why not switch?
The basic switching costs of CRM software are virtually nil. However, a representative of the previous CRM could have prevented the switch by augmenting the services and integration. The real expenses associated with changing CRM software come when a business starts to customize and integrate the software into the way it works. Once a CRM sales manager has trained the users in creating a weekly sales funnel in a CRM platform, just go ahead and try to convince them to switch software.
Can you offer your customers training to use your product or service to make your company stickier? Can you get your customers to integrate your product or service into their operations?
Widening your protective moat triggers a virtuous cycle: differentiation leads to having control over your pricing, which allows for healthier margins. This, in turn, leads to greater profitability and the cash to differentiate your offering further.
This article first appeared in the Berkshire Eagle on March 30, 2024.
