Economic moat

What is an economic moat?

An economic moat is a durable advantage that protects a company's profits from competitors. Warren Buffett is credited with coining the term, and his 2007 Berkshire Hathaway shareholder letter describes an enduring moat as what protects excellent returns on capital. Morningstar, which rates companies on moat width, names five sources: network effects, intangible assets, cost advantage, switching costs and efficient scale.

Why it matters to a revenue leader

A moat is a large part of what a buyer pays for at exit. In commercial services, moats can be local and practical. Route density lowers the cost of each visit, and years of site records make switching providers painful for the customer. A revenue leader widens the moat by selling recurring agreements in tight clusters and by owning the compliance history of every site the company serves.

A fire protection company holds inspection agreements at 70 percent of the hospitals in its metro area and keeps every system's test history. A national competitor bids 12 percent lower for a large hospital system. The customer stays, citing the cost and risk of moving years of compliance records, and the renewal closes with a 4 percent price increase.