Introducing a new idea to the market comes with risks: once your business gains traction, copycat companies will try to replicate your product and sell it at a discount. Developing a core offering with a strong technical moat will help you keep copycat products at bay and protect market share.
The concept of business moats is a piece of Silicon Valley jargon, albeit a simple one. A technical moat is the level of complexity associated with developing a product. It’s commonly associated with software as a service (SaaS) business models, but the same idea applies to direct-to-consumer retail.
The most successful companies have a product that is complicated to produce. That doesn’t necessarily mean it’s expensive to make or difficult for the consumer to use—it just means it will be harder, and therefore will take longer, for copycats to enter the market. That gives your brand time to build loyalty, cement itself as a leader in the space, and capture a strong market share—all of which will make eventual knockoffs of your product less viable.
A technical moat can take multiple forms. It could be a unique SPF formula that can be mixed in with everyday beauty products (like Supergoop!), or a means of manufacturing that can be vertically integrated and cost-effective (like Rothy’s).
How you dig your technical moat doesn’t matter—what matters is its width.
Here’s the secret to digging a formidable technical moat: it’s not a singular solution. It’s a series of small pieces that build on each other.
When direct-to-consumer brands are seeking that initial buy-in from investors, the focus will be on the product: how unique it is and how difficult it would be to replicate. But as the company scales, the technical moat will have to grow with it. Fortunately, there are plenty of ways to make your product offering exclusive, and they don’t all depend on your inventory.
Here are some questions you should ask yourself when building a new product and evaluating your technical moat:
It starts with your market vertical.
The degree of competition in the space and the very nature of the product partially determine how wide a technical moat you can dig. Part of the reason beauty and personal care products like deodorant are fundraising darlings is because they have a built-in technical moat: their formulas.
If you were to create, say, the world’s first sunscreen to last 24 hours without reapplication, it’d be because you found a magic chemical formula. You can bet competitors would analyze your ingredients label, but they wouldn’t know the recipe. BOOM: there’s your technical moat.
On the other hand, if your offering is built around a better delivery model but sells a relatively common product—like Backdrop’s mission to simplify home decor—you’ll need to dig a little deeper to find your business moat.
What was most difficult about getting your business off the ground?
If it was creating your own version of grandma’s secret recipe with ten-syllable chemical ingredients, congratulations: you have a strong business moat right out the gate.
But maybe it was designing your fulfillment strategy that enables a better buying experience. Or developing your brand voice that makes your customer feel seen. Maybe you stumbled upon that secret recipe by accident, but the challenge lay in convincing your customers to trust it.
Ask yourself what is actually hard to replicate in your product offering, and the answer might surprise you.
Take SaaS company heap.io as an example: Heap provides businesses with product analytics built around automatic data capture—basically, the product is designed to compile data constantly, so customers always have the numbers they need to answer specific questions.
You’d think the technical moat was that automatic capture, but it’s actually somewhat easy to write the code that enables that functionality. Heap’s real value lies in its carefully organized infrastructure and the details it chooses to collect—the things that make the datasets easy to navigate and useful to its customers.
The lesson: your technical moat might not be your big selling point. What provides value to the customer—at least on the surface—is not necessarily what makes your product hard to copy. Heap sells automatic data capture, but it’s their data infrastructure that’s hard to reproduce.
What real value are you selling? What about your particular business makes your brand stand out from the crowd? You already know what your differentiator is, so keep iterating on it to keep your competitors on their toes.
Software companies need to ask themselves how their product fits into their ideal customers’ everyday lives. John Doe could build the best inventory management software on the market, but no one would use it if it didn’t integrate with existing warehouse management software or ecommerce platforms.
DTC brands can learn a lot from this mindset. Does your product fit easily into your customer’s lifestyle? How might that give your brand a leg up over competitors?
Terra Kaffe sells high-end espresso machines. They could have focused their messaging on the flavor of their cafe-caliber lattes, but they focused instead on simplicity: press one button and the machine will grind the beans, froth the milk, and pour a delicious cup o’ joe. The product easily fits into their lifestyle without requiring the additional purchase of a burr grinder, tamping tools, and a milk frother. Terra Kaffe is selling convenience and counter space—two things their customers need in addition to caffeine.
New-age scrubs brand Figs leans on its “proprietary fabric technology” as a piece of its technical moat, but sharpened its edge by putting it in perspective. Their material is antimicrobial and moisture-wicking—some pretty compelling value props for the nurse sprinting around an ER. These scrubs fit easily into the lifestyle of a medical professional—it’s even anti-static, so Fido’s fur stays out of the operating room.
There are two components to this strategy: your brand and your product mix.
Let’s start with your brand. Your initial technical moat is what buys you enough time to develop brand affinity and secure loyalty, but once you’ve created a strong brand voice, it becomes an additional part of your technical moat. It’s cyclical.
Think about the strongest brands in the world today, and they all have one thing in common: they changed the way people feel about their products. Starbucks isn’t just a cafe, it’s an allegiance. Patagonia isn’t just an apparel brand, it’s a shared passion for saving the Earth.
Once a customer falls in love with your brand, competitors will need to do a lot more than copy your product to get them to switch. People will stick with a brand they love until they can’t buy what they need from that brand. That’s where your product mix comes in.
As your revenue grows, you may want to start exploring additional product lines. Casper did this when it rebranded itself as a sleep company over a mattress company: customers can now buy mattresses, sheets, pillows, and even pet beds through Casper. They built an ecosystem of products under the same brand umbrella, capturing more of their customers’ wallets.
This goes back to the concept of thinking like a SaaS company: how does your product fit into the consumer’s lifestyle? If your flagship product has a strong technical moat, it’ll be passed on to your other products because they’ll be integrated with one another.
Take a makeup brand, for example. It might have launched with foundation, eye shadow, and mascara, but it may launch a line of primer that works flawlessly with the foundation because they share core formulaic ingredients. A fishing rod brand could introduce new reels that attach to the rod with unrivaled precision—wouldn’t it be a safer bet to buy from the same brand than to hope a third-party reel will work just as well?
Build upon your customers’ loyalty to keep them within your brand ecosystem, grow sales exponentially, and dig a broader technical moat.
Creating a branded product ecosystem can launch a business into the stratosphere, but it’s a long-term play. Launch too many products right out the gate and you could dilute your flagship product’s sales or build yourself a mountain of debt.
Most successful DTC companies focus on growing sales with a hero product and cultivating a loyal customer base before they invest in new product development. Our research found that 25% of DTC brands offer a lone flagship product (though it’s important to note that we’ve defined “one product” as an umbrella term for a kind of product that may have several SKUs across variations in flavors, colors, or styles).
Even the DTC brands that sell across multiple product categories today launched with a single product before expanding into additional offerings (at least for the most part). These companies focused on executing a single product exceptionally well before developing additional products.
In general, these DTC brands are just as likely to introduce a new product line before an iteration of their hero product, but the timeline for each differs. On average, DTC companies introduce a new iteration of their hero product about 2.5 years after launching the company. An entirely new product line tends to take longer—averaging just under 4 years after launch.
Footwear brands tend to introduce variations of their initial offering—namely new style shoe styles—fastest, while furniture brands are quickest to introduce entirely new products.
There are two kinds of brands: those that shoppers come to recognize on sight and those that are relegated to the third page of Amazon search results. The primary difference? Technical moat.
Remember that technical moats are not a single panacea. They’re dug by lots of little shovels representing small differentiators that set your product apart.
To identify the elements of your business moat, remember to ask four questions: