Let's talk about Moats
If your SaaS doesn't have a moat. Are you setting yourself up to be cannibalized?
A moat refers to a sustainable competitive advantage that a company has over its competitors. The term "moat" comes from the protective ditches that were dug around castles in medieval times to protect them from enemy attacks.
For a startup, and especially a SaaS, having a moat is critical to its success, as it helps the to maintain a competitive edge in the market and sustain growth over time. Without a moat, a startup or SaaS is vulnerable to losing its customers (churn) and market share to competitors who can offer better products, services, or pricing.
A moat can take many forms, such as:
Intellectual Property: This can include patents, trademarks, copyrights, or trade secrets that protect a startup's products or technology from being copied by competitors.
Network Effects: When a product becomes more valuable as more people use it, this is called a network effect. Companies like Facebook and LinkedIn have strong network effects, as the more people that join these platforms, the more valuable they become for everyone.
Brand: A strong brand can be a moat as customers are often willing to pay a premium for a brand they trust.
Cost Advantages: Startups that can produce their products or services at a lower cost than their competitors can offer lower prices or better margins.
Switching costs: A switching cost moat is a barrier that makes it difficult for customers to switch from one SaaS provider to another. This can be due to a number of factors, such as: data lock-in, integrations, and familiarity amongst users who would need to go through training in order to switch.
Having a moat is essential for a startup to succeed long term. It not only protects the business from competitors but also creates a barrier to entry that makes it difficult for new entrants to compete in the same space. It is not surprising that this is always one of the first questions asked by early stage investors.
A strong moat can give a startup a sustainable competitive advantage that can lead to long-term growth and success.
Some examples of SaaS businesses with a strong moat are:
1. Salesforce
Moat type: Network effect
How it works: Salesforce's platform is used by millions of businesses around the world. This network effect makes it very difficult for new entrants to compete, as they would need to attract a large number of users to their platform in order to be successful.
2. Adobe
Moat type: Switching costs
How it works: Adobe's products are used by businesses of all sizes. These products are often integrated with each other, which makes it difficult for businesses to switch to a different platform. This is because they would need to invest a lot of time and money in migrating their data and processes to a new platform.
3. Microsoft
Moat type: Brand
How it works: Microsoft is one of the most well-known brands in the world. This brand recognition gives Microsoft a significant advantage over its competitors. Businesses are more likely to choose Microsoft products because they are familiar with the brand and trust its products.
4. Zoom
Moat type: Intellectual Property
Zoom is a cloud-based video conferencing platform that allows businesses and individuals to communicate face-to-face over the internet. Zoom has a strong moat built around its intellectual property, which includes its patented video compression technology, its user interface, and its ecosystem of integrations with other applications. This intellectual property makes it difficult for competitors to imitate Zoom's platform and offer a comparable product.
5. Wix
Moat type: Cost Advantages
Wix has a strong moat built around its cost advantages, which include its economies of scale, its low-cost workforce, and its efficient operations. These cost advantages allow Wix to offer its products at a lower price than its competitors, which gives it a significant advantage in the market.
So how can you apply this to your startup or SaaS?
There's some questions to ask yourself about your startup or SaaS business:
What are the switching costs it will take to get users to use your product rather than the incumbent? And what switching cost will your product or service create that will prevent users from switching again?
What is my unique value proposition? What makes my product or service different from the competition? How will I deliver on that value proposition? SaaS founders should obsess about this as it plays a very strong part in sales and retention too.
What will my network effects be? How will my product or service become more valuable as more people use it?
What are my intellectual property assets? Do I have patents, trademarks, or other intellectual property that can protect my business?
What are my brand assets? Do I have a strong brand that customers trust? If I don't, then how will I build that?
What are my customer relationships? Do I have strong relationships with my customers that would make them reluctant to switch to a competitor?
Another great resource I would recommend here is the book Business Model Generation by Alexander Osterwalder, Yves Pigneur, and a host of contributors. In this book, the Business Model Canvas is presented where value propositions and customer relationships form a good chunk of mapping a business model.
What I haven't mentioned in this article is supplier relationships and distribution channels as moats. And I'm sure there are lots of other ways to create moats too.
What are your moats?
Feel free to add to the discussion on moats for SaaS? You can reply to my thread on twitter here: https://twitter.com/growth_hc/status/1657279927874637827