What Makes a Moat Durable

Every profitable business attracts competition. The interesting question is not whether a company is currently earning good returns, but what stops someone else from taking them away.

Advantages that erode#

Being cheaper, being first, having a better product, having a well-known name — these are real advantages, and almost all of them decay. Prices get matched. Products get copied. Brands fade when the thing behind them stops being good.

A durable moat is not a better version of what competitors do. It is a structural reason why doing the same thing costs a competitor more than it costs the incumbent.

The structures that persist#

• Switching costs — leaving is expensive in time, risk or retraining, so customers stay even when a rival is marginally better
• Network effects — each additional user makes the product more valuable to every existing user, so the leader's lead compounds
• Scale within a defined market — fixed costs spread over more volume than anyone else can reach in that specific market
• Regulatory or contractual position — licences, approvals and long contracts that a competitor cannot simply decide to acquire

How to test one#

Ask what a well-funded competitor would have to do to take ten per cent of this company's customers, and then ask what that would cost them. If the answer is "spend more on marketing", the moat is shallow. If the answer is "persuade customers to accept months of disruption", it is not.

The test is deliberately concrete. Moats described in adjectives — strong brand, loyal customers, great management — are usually being asserted rather than analysed.