Moats and Competitive Advantage
A moat is a durable advantage that helps a company defend profits over time.
Common Moat Types
Network Effects
The product gets better as more people use it.
Switching Costs
Customers find it painful or risky to change providers.
Brand
Customers pay more for trust or status.
Cost Advantage
Scale, process, or technology lets the company produce cheaper.
Regulatory/Legal
Licenses, approvals, or patents limit competition.
How Moats Show Up in Financials
- Strong and stable gross margins
- Persistent returns on capital
- Pricing power during inflation
Moat Erosion
Watch for:
- Margin compression
- Slowing growth in core segments
- Rising customer acquisition costs
Summary
Great companies are often defined by what competitors can’t easily copy. Identify the moat, then look for evidence it’s holding.