An economic or business moat refers to a business’ ability to maintain competitive advantages over its competitors. This is designed to increase long term profitability and keep ahead of the market. Like with a castle, the moat serves to protect those inside and their riches from outsiders. This metaphor helps show how shielding your business from competitors can prove very useful.
If you are starting a business, it is advised that you factor in ways to stand out from your competition from the outset. In this article, we will describe some ways you can create a moat for your business, along with important legal issues you must consider along the way.
Network Effect
The network effect occurs when the value of a company’s service increases for both new and existing users as more people use it. For example, if you were starting an online business that deals with the sale of second hand clothing for third party vendors. The more vendors you have, the greater the option of clothing, and likely the more buyers that visit your store. The more buyers you have, the greater the likelihood there is that vendors will want to sell their items with you. If done well, it becomes a cycle that is very difficult to stop. Therefore, if you are looking to start a business, finding one that has those types of two way networks is incredibly useful for forming an economic moat. In a booming online marketplace, there are many different opportunities for you to capitalise on this effect.
Intangible Assets
Intangible assets of your company can also help build an economic moat around your business. Intellectual property and copyright over things like patents and trademarks form the basis of these intangible assets. Although intangible, they are nonetheless extremely profitable. By protecting the brand of your company, along with your ideas, it prevents competitors from being able to exploit valuable commodities that might make your business unique. You can register your trademark with us. If you are unsure about how best to protect your ideas and branding, it may also be invaluable to consult with a patent attorney or trademark lawyer.
Cost Advantage
Businesses with a cost advantage will be able to undercut competitors. A cost advantage is a business that can produce a particular product or service at a lower cost than the competition. Therefore, technological advantages, heightened productivity, and resource wealth are all factors that may determine your cost advantage. Capitalising on new technology is encouraged to create advantages for you and your business.
Switching Costs
What follows from a cost advantage is the notion of switching costs. When switching from your product or service is simply not viable due to a cost advantage, it locks clients in. Even once you have secured your clients, it is still nonetheless important to keep them. Retaining your customers should be a continuous effort for you and your business.
Efficient Scale
When a niche market is effectively served by one or a small handful of companies, efficient scale may be present. If your expertise or technological supremacy yields a niche market, particularly in an area that would cost other competitors too much money to establish the same assets, you will possess an advantage. For example, if you possess a rare skill that would require competitors years of training and costs to develop, it is unlikely they will try to develop those skills if the return would fall short of the costs needed to commence business.
Legal Requirements When Forming a Moat
Whilst it is great to get ahead in business, it is also important that you fulfil your legal requirements. It is important that you always act in good faith in all business dealings. It is also integral that you do not implement any unfair restraint of trade agreements, or act unconscionably. Maintaining the appropriate business ethics toward both your competitors and clients is paramount. Read more about these legal obligations on the Australian Consumer and Competitions Commission website.
