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Moats in B2B SaaS businesses

There is a lot of content about sustainable competitive advantages in consumer business. I didn’t find significant analysis on this for B2B companies. This article tries to identify all the different types of moats successful B2B software businesses can build around them.

Companies think about strengthening or creating new moats as part of their strategy. That said, the type and strength of moats you can create is many times a characteristic of the product category.

These moats are a necessary part in creating businesses with big valuations. They can result in huge outcomes when combined with a big target market and a sustainable distribution strategy.

These considerations are critical for fast scaling B2B companies but it is also useful to think about these right at the start of a startup. They will be a critical input in identifying the size of the market opportunity for the startup and even how they should approach their very first MVP.

I have bucketed the various types of B2B moats into 3 categories below — switching costs, network effects & economies of scale.

Switching costs

The loss customers will incur by switching to an alternative. These are very common with most B2B businesses as there is generally some costs involved in switching providers.

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1. Systems of record — store valuable company data that would be risky and costly to migrate or access if company switches solutions. eg — ERP like Netsuite, HCM like Workday, CRM like Salesforce, Atlassian, lot of Oracle, SAP products.
2. Embedding — Product becomes integrated in the company with employee’s regular workflow and other products. eg — most of the systems of record above, Stripe (integrated with ERP and other processes).
3. Add use cases for different teams — Expand the product to provide value to more teams inside the company. More teams using the product, harder to switch it out. eg — Pendo (adding use cases for customer success & marketing along with product teams)
4. Increase frequency of use — The more frequently users use the solution, the more habitual they become to using it and the harder it will be to switch from it. eg. — Dropbox (adding document collaboration on top of file sharing)
5. Intra-company Network effects — these are generally communication or collaboration products where each additional employee using the product, makes it more valuable to the whole employee base. This enables these products to spread fast inside the company, thus making it harder to switch them out once a lot of employees are using it. eg — Slack, Zoom, Google Docs, Dropbox, Figma did this for design tools which traditionally did not have collaboration built-in.
6. Costly implementation — when implementing the solution requires lot of cost from the customer, it becomes expensive for the customer to switch solutions. While this can be a moat, if your software is very complex to implement, it also makes it a harder sale and slows down your distribution. eg. — Palantir, most system of record software.

Network effects

When each additional customer makes the solution more valuable to the whole customer base.

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1. Cross-side network effects — These are cases where the company had another user group along with their paying customers. The more customers attract more users in the other group, which in turn makes the product more valuable for the paying customers. eg — B2B marketplaces, Plaid & Stripe(more banks and cards working with Plaid/Stripe as they had more customers), Carta (more investors using Carta as some of their startups adopted it and then asking their other startups to also use it).
2. Application Platform — Also a type of cross-side network effect. Many companies are able to provide an attractive platform to develop applications. More customers -> More attractive for developers to create apps -> More value for customers from platform specific apps. eg. Salesforce, Shopify, Microsoft Windows(one of the most profitable moats of all times)
3. Trained Developers or Implementers — In businesses that require developers or other trained experts to implement the solution, more people become trained in the solution as the customer base increases. This makes it more attractive to adopt and continue using that solution. eg — Twilio, Stripe (for developer facing). Salesforce, Microsoft (for implementation).
4. Industry Standard — As a company’s offering gains enough market share, the rest of the tools and services in the ecosystem start to become more compatible with this offering which can create a strong lock-in in some industries. eg. — Autodesk (ecosystem of manufacturing and construction related tools and services build around it)
5. Data powered products — Many data powered products, especially machine-learning based and content-based products, continue getting better as more data is fed into them. More customers -> more data -> better product for all customers. These can depend a lot on the domain and how easy it is for new entrants to get enough data to provide 80% of the value. I could not find very successful examples of this in B2B.
6. Customer community — Online community for customers to discuss topics related to the solution area . A highly engaged community provides additional value to all customers. eg. SAP, Salesforce Trailbrazer community, Cultureamp
7. Benchmarks — Use aggregated data across the customer base to provide benchmarks to individual customers. eg — Workday Data as a Service, ADP’s employment reports

Economies of Scale

Cost benefits the company is able to have when they have a huge customer base — software generally has low marginal costs so these can be huge. They can use this for further investments to increase their moat or pass on the cost benefits to the customer to price out competitors.

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1. Amortization and sharing of costs — Companies can spread their fixed costs over a larger base. These include all the fixed costs in developing, maintaining and selling the solution. eg. many cloud infrastructure companies and products like AWS, Twilio benefit from this because of high cost to provide the solution.
2. Bundled Enterprise solutions — Companies in many scenarios prefer buying an integrated family of products vs point solutions. This minimizes the number of vendors they need to work with. Bundled solution can create better integrated experiences vs standalone products. Companies with a large customer base can better invest in building out these bundled solutions. eg. — Microsoft (vs point solutions like Slack), Workday(Finance+HR system), Stripe (bundling together various payments & operations solutions esp for smaller biz).
3. Product Investments — Invest into continue improving the products and technology for the specific market. This could also include building more focused solutions for different verticals. Most companies do this to some extent, but some companies better capitalize on it by building an innovation culture & some markets have more room for continued innovation. eg — Stripe & Shopify have continuously innovated to solve more problems in the huge markets they are addressing.
4. Integrations — Some companies key value proposition is around having integrations with a large number of other tools. They can justify building and supporting a long tail of integrations when they have a huge customer base to support the development cost. eg — Mulesoft, Fivetran
5. Partnerships — Bigger companies can more easily invest in forming partnerships with others in the ecosystem. This includes partners who have complementary products to integrate with their solution or sell it together. It can also include system integrators whose primary role is to bundle together a bunch of solutions to implement a customized bundle for large companies. These partnerships make their solution stronger and accelerates sales. eg — various infrastructure companies partnering with Google/Amazon/Microsoft cloud offerings.
6. Negotiating leverage — They can procure inputs from suppliers at a lower cost because of the large purchase.

Besides the above, some of the common and widely applicable moats I didn’t go into are creating a strong brand, hard to copy company processes and unique access to talent, suppliers or customers.

I would love to hear from others if there are any relevant moats I missed here.