Moats (Rent The Runway, Uber, ClassPass)
Although closely related to Barriers to Entry, a moat is the economic advantage that an existing company has over a new entrant. This also included switching costs.
Here is an example of a moat. As Seth Godin writes about the Bloomberg terminal in his book “Purple Cow”,
“The Bloomberg, as it’s known, should have been replaced by the Internet, yet this customized computer is on the desk of just about every important player on Wall Street. After all the net has access to huge amounts of information, it’s relatively easy to use, there is multiple source for it, and it’s largely free. The Bloomberg on the other hand is very expensive and very tricky to use, and that’s why traders and other investors insist on it. They have gone through the pain of learning how to use it and they’re not prepared to give up that expertise.”
Uber
Because of the low switching costs from Uber to another ride sharing company, assuming they are also available in that city, share of mind is the moat. Uber spends a lot in marketing dollars to make sure that when you want a ride, it’s their app that you open. The irony is that all the work that Uber does with local governments to legalize ridesharing also benefits its competitors by lowering the legal barrier to entry.
ClassPass
ClassPass’ moat is a land grab. If gym X is already on ClassPass and ClassPass is yielding enough students, then they wouldn’t need to use a competitor. In addition, if ClassPass manages the gym space inventory, then bringing in a competitor would result in a switching cost.
Square
If a business was already using Square POS, the switching cost of migrating systems to a different POS would be a high one. In addition, switching a highly integrated process like credit card processors is an unnecessary pain.
Groupon
Groupon’s moat is also the land grab. If a business is receiving enough traffic from Groupon, there will be no need for them to use other daily deal sites. Being the largest player in the industry allows for you to have the supply (of customers) to satisfy the businesses’ demand.
Airbnb
Because a user is listing their space and space is finite, if Airbnb is filling the demand, then there is no need to seek users from other platforms.
Rent the Runway
Because of scale, relationships, and a general understand of their customer based, Rent the Runway can fulfill the needs for a dress for any occasion, at the best price. In addition, it has taken in it’s most critical component in-house, their dry cleaner. With all the dresses that are going through the system, they have become the largest dry cleaner in the US, measure by pounds per hour. This vertical integration helps with being competitive with pricing.
Takeaway
The reoccurring theme amongst these businesses regarding moats are land grabs, switching costs, and share of mind. First mover advantage allows a company to define an industry and be known as the leader (even if they are the only one). It also lets a company sell its services without having to compete with competitors or incumbents — making it a lot simpler. As a first mover, you will have switching costs playing in your favor. The harder it is to switch over to the new service, the less likely it will happen. Lastly, share of mind gets tougher as more and more competitors emerge. Once you grab it, it’s best to retain for as long as possible
Exercise
- Are you the first mover in your industry or are you a “me too”?
- Can you position your company to service a market which you can corner?
- What kinds of switching costs does your product have?
- Can you make your product stickier (higher switching costs)? Or make the transition from an incumbent easier?
Experience with past Citadines Group clients
We had a client that created a connected device that monitored your sleep. As more activity trackers came on the market they felt like there was too much noise and that they would get killed by a big player such as Fitbit or Nike. So we decided to make integrations with other connected devices that were affected when a person falls asleep and when they awake. We built a connection from our client’s product to a connected thermostat to make the home warmer while they were sleeping. In addition, once they awoke, we would turn on the coffee machine so it would start brewing. These defensible peripherals is why existing users of the product would not abandon it for it’s competitor.
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