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Small thread on Business Moats of:
-Uber [Network Effect at market place]
-Gillette [Sunk Cost]
-Starbucks [Cultural and Brand]
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-Uber [Network Effect at market place]
-Gillette [Sunk Cost]
-Starbucks [Cultural and Brand]
2/ Uber [Network Effect at marketplace]:
What made Uber successful is the access it has on the demand as well as the supply side of the market. It got this control by offering better incentives and certainty to drivers who struggled to find a customer in a fragmented marketplace
![2/ Uber [Network Effect at marketplace]:What made Uber successful is the access it has on the demand as well as the supply side of the market. It got this control by offering better incentives and certainty to drivers who struggled to find a customer in a fragmented marketplace](https://pbs.twimg.com/media/E0sajGrVIAcrtWs.png "2/ Uber [Network Effect at marketplace]:What made Uber successful is the access it has on the demand as well as the supply side of the market. It got this control by offering better incentives and certainty to drivers who struggled to find a customer in a fragmented marketplace")
What made Uber successful is the access it has on the demand as well as the supply side of the market. It got this control by offering better incentives and certainty to drivers who struggled to find a customer in a fragmented marketplace
3/ For passengers, it provided a degree of certainty of getting a cab when needed. It brought together the two pieces, where previously you would be looking for a cab on one street while not knowing that there is a cab available in the street beside.
4/ Also, to ensure supply-demand balance, Uber came out with the “Surge-Pricing”. During peak hours or when a whole lot of drivers are logged off, the extra incentive from the surge pricing ensures that the supply(drivers) is back up to meet the demand.
5/ To fend off competition, Uber also discounted the passenger while incentivizing the drivers at above-market rates. This ensured that more customers log in to Uber while the drivers also do the same.
6/ The cycle of more drivers joining because more customers are available and more passengers joining because of the certainty of finding a ride builds a business moat for Uber.
7/ Gillette [Sunk Cost Moat]:
The convenience of disposable shaving blades made them an instant hit in the 1900s which soon gave rise to the “razorblade business model” where an initial product is sold at a low margin and the recurring product at a higher margin.
![7/ Gillette [Sunk Cost Moat]:The convenience of disposable shaving blades made them an instant hit in the 1900s which soon gave rise to the “razorblade business model” where an initial product is sold at a low margin and the recurring product at a higher margin.](https://pbs.twimg.com/media/E0sasBFVUAETykG.jpg "7/ Gillette [Sunk Cost Moat]:The convenience of disposable shaving blades made them an instant hit in the 1900s which soon gave rise to the “razorblade business model” where an initial product is sold at a low margin and the recurring product at a higher margin.")
The convenience of disposable shaving blades made them an instant hit in the 1900s which soon gave rise to the “razorblade business model” where an initial product is sold at a low margin and the recurring product at a higher margin.
8/ The model works on the basis that a low margin product (Razor) is priced in such a way to attract more and more people, whereas the recurring product (razorblade) is priced at higher margins to ensure that the company earns fat profits on the repeat purchases.
9/ There is a psychological play here as well. Once the customer buys a Gillette Mach 3 worth Rs. 200, it becomes almost certain that the customer is going to place orders for the 4pack blade cartridge worth Rs.600 (Rs.150/blade) from where the company would earn high profits.
10/ Chances of customers buying another razor (switching) becomes low. The company also offers a 12pack blade cartridge for Rs.1200 (Rs.100/blade) to incentivize customers into staying with the company longer as well as spending more.
11/ A similar sunk cost model is also used by Coffee and Tea vending machine providers where they earn margins on the recurring refill of beverages while they sell the machine at minimum margins.
12/ But is pricing the product low enough sufficient to make a sale? No. Gillette has been spending big amounts on marketing, reaching out to the public with the benefits and value proposition of using a Gillette razor as well as coming out with new products.
13/ This model was not adopted from the start. Gillette used to sell both blades and razors at healthy margins but the expiration of patents and entry of competition ensured that the business model of the company changed for the good making it a market leader for decades.
14/ Today Gillette faces competition from companies like Dollar Shave Club who are using subscription (also recurring) business models and upselling & cross-selling other high margin products in bundles delivered directly to customers, removing the middlemen.
15/ Starbucks [Cultural and Brand Moat]:
Starbucks from the beginning was keen on giving a sophisticated beverage experience to its customers, from the colors and decor of the store to the fancy names and kinds of the beverage.
![15/ Starbucks [Cultural and Brand Moat]:Starbucks from the beginning was keen on giving a sophisticated beverage experience to its customers, from the colors and decor of the store to the fancy names and kinds of the beverage.](https://pbs.twimg.com/media/E0sboO9VEAQKpQh.png "15/ Starbucks [Cultural and Brand Moat]:Starbucks from the beginning was keen on giving a sophisticated beverage experience to its customers, from the colors and decor of the store to the fancy names and kinds of the beverage.")
Starbucks from the beginning was keen on giving a sophisticated beverage experience to its customers, from the colors and decor of the store to the fancy names and kinds of the beverage.
16/ Not only this but Starbucks also upped the Coffee-shop game by bringing in better brewing techniques, premier beans, and an overall superior quality experience. The careful culmination of the above things steadily built a moat for Starbucks.
17/ An intangible moat, where the customer feels status-driven to have a cup of coffee at a Starbucks store instead of another coffee shop. It crafted the experience its customers loved. Like an Apple Store for coffee!
18/ Stores an attraction in itself were crafted to function as shared space, a third-place apart from home and office.
It was also for this reason that Starbucks grew without franchising because it wanted to control the experience of its customers.
It was also for this reason that Starbucks grew without franchising because it wanted to control the experience of its customers.
19/ Something which is easier to feel but harder to explain. So much so that the rates of real estate in an area increased on the opening of a store (increased convenience).
20/ This cultural moat also helped Starbucks when it launched its membership rewards service. Instead of paying with cash or credit card, customers can load the Starbucks wallet to pay with and get double the reward points, which in turn could be redeemed to buy free coffee!
20/ The customer loyalty ensured that people are comfortable filling in money in this wallet, accumulating $1.28 Billion or around Rs.9500crs in an interest-free float as of Sep’20.
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