How to Build an Economic Moat

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How to Build an Economic Moat

To define, an economic moat is a long-term competitive advantage that allows a company to earn oversized profits over time. Quite simply, companies with a wide moat will create value for themselves and their shareholders over the long haul, and these are the companies you should focus your attention on.

There are a number of ways a company can build a sustainable competitive advantage in its industry. Among the more qualitative measures commonly used to assess a firm’s economic moat:

• Creating real or perceived product differentiation
• Driving costs down and being a low-cost leader
• Locking in customers by creating high switching costs
• Locking out competitors by creating high barriers to entry or high barriers to success
• Serving a limited market.

The more types of moats a company can build, the better.