7 Best Moats To Keep Your Company Profitable

There is not enough room for everyone.

The other day it was announced that Jasper AI, one of the first popular AI copy-writing assistants, is firing 30% of its staff to recalibrate its burn rate.

This was unexpected news in an Industry that for the last year was predicted to be the gold rush of the next few decades.

Jasper AI was early in the game. They are an OpenAI API wrapper that was around well before the release of ChatGPT, which marked the arrival of AI in a practical sense.

Yet, even with a head start, they weren’t able to maintain a lead to everybody’s surprise.

In the conversation that many tech entrepreneurs are having around this, I would personally describe it as relatively delusional.

Everybody wants to build an AI product right now. So much so, they are willing to completely ignore the impossibility of the task of navigating the competitive landscape.

If you read the comments on this post you’ll see people realizing the message Jasper’s failure is sending.

Jasper, one of the first companies to sell an AI copywriting tool, has zero competitive advantage in the marketplace.

How then, can one expect to create real competitive advantage, especially if you’re not planning on raising VC funds (though VC funding in itself is not protection)?

In this article, I’ll summarize 7 ways a tech company can build a real moat and protect itself from the forces of competition.

These are from the book 7 Powers by Hamilton Helmer, but I have revised them for bootstrapped tech founders in particular.

Lean Economics

This is as opposed to scale economies, which means the larger the business is the more it could spread its fixed costs around how many products are sold. Effectively equaling higher profit per unit sold.

The issue with that in a tech context is that there is already a marginal cost of reproduction whether you are big or small. This actually creates an advantage for smaller players.

Last weekend I had a quick conversation with the founder of Better Legal, an Indie competitor to Legal Zoom and Inc File. When I asked him how he thought about differentiating himself from his larger competitors he said plainly that his economics were much better than theirs due to his principle of staying lean.

This affords him the ability to come in at a much lower price compared to his competitors and remain healthily profitable. He’s about to cross $1M ARR without having raised any capital to speak of.

Network Economies

This refers to a platform where the value of the platform is partly determined by the number of nodes in a network.

The simplest example is social media. People join social media because there are other people there. It’s the other people that make it valuable.

Slack is another example of Network Economies in action. You join Slack because that’s where the rest of your team is.

Marketplaces live and die by their Network Economy. The upside is once the network is developed, the platform has an easier time retaining a strong position in the market. The downside is the difficulty of creating the network in the first place.

The chicken or the egg problem that’s inherent in creating a strong network economy seems to be why these types of companies rely on a different kind of leverage in their startup phase.

Generally, that leverage is large amounts of VC funding but it can also be other forms of leverage like owned distribution channels (Microsoft Teams is an example of a product that leveraged its vast distribution channel to take leadership from Slack.)

Counter-Positioning

As it sounds, this is about positioning yourself as the opposite of the leader in your space. This can take a lot of different forms.

Indiehackers.com is a good example of a counter-positioned business. Their functionality is a lot like Reddit, and you could also say they compete with other social media platforms like Twitter.

But the major social media platforms have positioned themselves (mostly) as topic-agnostic. They are for people to have conversations about anything. Indie Hackers on the other hand niched down and is only about Indie Hacking.

When AirBnB launched they counter positioned themselves against both hotels, which they are obviously very different from, but also VRBO. They did this by focusing their product on renting rooms in homes instead of entire homes.

Counter-positioning is often affiliated with targeting a smaller portion of the market and making your company exclusively for them.

Rumble positioned itself as the Free-Speech version of YouTube. Essentially taking the biggest complaint about YouTube and betting their company on it. It’s not expected that they will become bigger than YouTube, but they could still use the strategy to become a great and profitable company.

Switching Costs

This is the cost in money or effort it will take a customer to switch from your product to a competitor’s.

Enterprise softwares often rely on this for keeping customers around because companies often based much of their process around the operational software they use.

To use an example, let’s say you use ClickUp for work management across your whole company. You’ve spent many hours putting templates on the project and task level together, you track your time through there making it integral to charging clients and paying employees, etc… You’re gonna have a hard time considering ditching it for another software.

Even if that other software has all the same features of the same quality at a lower price, you’ll likely consider the cost of switching too high to see that as a necessary project right now.

IMO this is what a lot of email newsletter tools are doing wrong. They make it too easy to take all the resources you have and switch them over to a different tool.

Branding

This is what it classically means. How recognizable is your brand? When people think of the problem you solve, is your brand the first solution to come to mind?

The writers of the book The 22 Immutable Laws of Marketing call this “mind share” and whoever leads in mind share has access to a lower cost per customer acquisition than its competitor by default. In fact, they make the case that whatever your customers spend on marketing, a portion of that is effectively spent to your benefit as opposed to theirs.

Branding and Positioning (or Counter-Positioning) are closely related. Positioning is about how you identify yourself and who you are speaking to while branding refers to how aware your target audience is of you and the problem you solve.

Cornered Resources

This is one of the more traditional advantages. A cornered resource is something that the market finds valuable and you have exclusive access to.

In a generic context, it could be you own the land your coffee shop sits on, AND it’s in a high-traffic area.

In tech, it’s a little more elusive. Generally, tech startups are encouraged to ship products fast and begin promoting them. The flaw in the tactic is that if you build a tech product in a day, that’s about how fast someone else can build it too. If they can’t build it faster.

A cornered resource for software is more likely un-gated access to exclusive distribution channels. Like owned distribution for example. Though it doesn’t have to be owned, it does need to be exclusive or else it isn’t cornered.

In some senses, brand recognition could be thought of as a cornered resource as well. AT&T has gone bankrupt a couple of times and has sold off the brand for another company to take advantage of.

Process Power

Similar to scale economies this is about having the unique ability to create a product for much cheaper than your competitor.

Tesla as an example has accomplished this by rethinking the automobile business model altogether. They did that by:

  1. Going back to being vertically integrated with their design, R&D, manufacturing, and distribution.

  2. Selling directly to consumers mainly online. This has saved them 30% profit margins that traditional automobile companies have had to pay out to dealerships.

Vanguard is another example of a company that changed the cost structure of retail investing by moving from mutual funds with active managers to index funds that have much cheaper management fees.

That method has since been adopted by its competitors but only after Vanguard established itself as the leader in their space.

Conclusion

One of the reasons I wrote this newsletter is because, in the last week, I reached out to about 100 indie hackers building new products.

I’ve seen something kind of disturbing. There are many people building the exact same products as each other. Although the general (bad) advice is “there’s enough space for everybody, don’t worry about your competition” all but one are going to struggle.

Mainly these people are building in AI. Their either building customer service chatbots, sales tools, artistic QR code generators, or PDF summarizers.

If this is you, what’s going to be imperative is finding a way to differentiate yourself from everyone else building one of these products. Don’t get wrapped up in the silliness of disregarding market dynamics altogether and instead strive to adopt some of these competitive advantages so you don’t end up like Jasper being cannibalized by AI hype.

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