The playbook to develop strategic brand moats

Fabian Di Marco

  • Founder and managing director, Tzu & Co
Fabian is an experienced marketing and digital business strategist. He has consulted on a global scale for some the world’s largest and most recognised brands, like Qantas and Western Union, as well as B2B juggernauts like Amcor and ICL. Fabian works primarily across the retail, finance, insurance and travel industry for both scale-ups and enterprise clients.

Warren Buffet is an unlikely ally for marketers. But his belief businesses need strategic moats that increase their value in the market while acting as barriers to competitors can offer marketers a new playbook for brand building and driving growth.

In the rush to transform digital customer journeys, modern marketers can sometimes overlook how brand value is conveyed through every touchpoint – from the intangible like brand perception, to the experiential in the form of using products and services. A brand’s ability to differentiate itself from competitors, establish its unique value and build loyalty is the outcome of pushing this customer experience through the entire value chain.

And it’s not just the boss of Berkshire Hathoway who believes in the value of strategic moats. New York University’s professor of management and organisations, Sonia Marciano, defines a defendable strategy according to several criteria that can apply to marketing. This includes hard-to-replicate brand attributes, a high-value customer relationship, the networked customer benefit and embracing always-on innovation.

Brand attributes as strategic moats

For a business, economic moats act as barriers – defendable, high-barrier-to-entry initiatives and attributes that separate it from its competitors. They're sustainable differentiators in the market and are rewarded by the suppliers, customers and shareholders of the business through preferencing, loyalty and business valuation.

To competitors, moats are differentiators and obstacles difficult for them to simply replicate on a like-for-like basis. To customers, they're brand attributes that are hard to swap out for another brand. They add value to your business.

Apple has developed its ecosystem to link someone’s phone, computer and other devices with their digital life in the form of contacts, music, TV, emails and so on. It creates one of the ultimate barriers to competitors through the way it locks in customers across devices and services. And friction for customers looking to swap to alternative, who risk losing the simplicity of integrated experiences, rewarded to them for their brand loyalty across extension lines.

What is it that makes the Hermès Birkin bag, selling for thousands of dollars while costing a few hundred dollars to make, worth the price to customers? Quality of materials and workmanship can only account for some of it. In essence, it’s the perceived value of the bag that derives the iconic brand and its association with French actress, Jane Birkin. The value of its specialness and the exclusivity imparted to the customer is defined and owned by the brand. For someone to shift to a low-cost brand like Target, for example, costs them through the loss of identity as that person.

Google’s search reach and its ad business off the back of this is another wide economic moat and something many marketers know all too well. An economic moat can also take the form of an iconic brand (think Channel), omnipotent retail (think Amazon) or cult status (think Levi’s).

It’s not just global, highly recognisable retail brands that have strategic moats. There are many examples of local businesses developing strategic advantage, often in a market dominated by large, often global, competitors.

Online beauty retailer, Adore Beauty, has made customer centrism an obsession that informs all its decisions. Its personalised beauty tutorials and guides developed as podcasts, videos and blogs speak directly to customers’ concerns without a hard sell. This is now a valuable content ecosystem that would be difficult for another brand to simply replicate because the content is imbued with Adore’s customer-care ethos.

High-stakes customer relationship

The brand attributes, whether it’s a luxury bag, iconic jeans or cool gadget, will go a long way to cementing a high-stakes customer relationship, where making the wrong choice of brand is a risk to the buyer. The consideration hinges on how much friction and risk is involved in shopping for an alternative for the buyer.

If a customer can swap between one brand and a competitor’s with little friction or ‘cost’, the product or service is indifferent to the customer and therefore retention is volatile. However, if a customer perceives a risk in ‘losing’ something by shopping for an alternative, retention and yield in the brand increases.

In the case of Adore, while it sells many of the same products as competitors, its popular loyalty program raises the stakes. If a customer purchases from an alternative, they risk losing loyalty points and benefits, such as free express shipping.

Marketers help strengthen differentiation in the product and customer experience, where they can also create things which make it difficult for a competitor to gain territory.

A high-stakes customer relationship can protect the brand from competitors and instil value in the minds of customers. It’s like Buffet has said: “If you've got the power to raise prices without losing business to a competitor, you've got a very good business.”

Network customer benefit

Amazon is one of the defining examples of how the network effect bring values to customers. It’s by no means the only one and brands don’t need to have its size and reach to create customer benefit from the networked effect.

Simply, the network effect is a phenomenon where the more people or participants in a network improve the value of a good or service. The more people who join the network, the greater the benefit for them. A good local example is online homewares site, Temple & Webster, which has worked to increase its value to customers by adding more suppliers to its platform that builds out the product range that brings more customers. Retail brands don’t always need to be the size of Ikea to win at this.

Having an extensive range of products isn’t a standalone attribute – it’s an element of smart, strategic business design. How? Temple & Webster has an innovative drop-shipping model allowing suppliers to ship products directly to customers. A lot can go wrong with this model, but T&W has turned it into a strategic advantage by doing it well – an impressive achievement.

The network effect is about successfully building a flywheel, where the value or experience for customers increases as more customers join or use the service. It is a challenging undertaking, but when it’s successful, the model can accelerate growth and is a defensive play, as the customers lose that value by leaving the network.

Innovation is BAU

All brands need to evolve and innovate. It’s essential to growth, particularly for brands with homogenised products (think private health insurance or superannuation). When Elon Musk said in a 2018 earnings call “moats are lame” he might have had a point. Hardly surprisingly that the man behind Tesla believes the pace of innovation fundamentally determines competitiveness in a business.

Yet innovation can actually be viewed as a key element of building strategic moats, rather than a single replacement for it, as the PayPal co-founder would have us believe. But, like Musk’s space play, there should always be room for moonshot innovations.

Take the example of Temple & Webster. While competitors are playing catch up with the demands of many newly minted digital consumers, it is investing in moonshot innovations such as AI and augmented reality projects that could have the potential to grow the business exponentially. These innovations utilise the value and diversity of data Temple & Webster has generated through the volume of transactions and customer behaviours over many years.

The value of strategic brand moats

To be successful in creating moats around the business, marketers must realise the value they add in strategic brand building and the role customer centrism and product differentiation plays within it. It can enable brands to benefit from controlled or growth in market share, greater profit margins and trusted stakeholders that allow for disruptive innovations, like shareholders in Tesla and Amazon have found.

Marketing is not just about advertising and pre-purchase communications. It requires connection with other parts of the business – fulfilment, sales and customer service. Brands are realising this and changing the ‘typical’ marketing role to reach into areas like customer support and sales. Some are creating environments that better couple the disciplines to work together rather than in silos.

Strategic moats create differentiation that acts as hard-to-replicate barriers and reinforces the value of the brand experience. They afford brands the luxury to lead in pricing, rather than react to it. It’s rewarded with greater yield through stickier and more loyal customers. This is valued by both customers and shareholders.

Marketers can apply the lessons from these online retailers to their own marketing strategy and chart new avenues for growth.

Tags: brand strategy, marketing strategy, marketing leadership

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