Most business owners believe they have a competitive advantage. Most are wrong.
This gap between perception and reality costs millions in failed acquisitions and overvalued exits every year.
Why this matters
The problem is not dishonesty. Business owners genuinely believe their advantage is real. They see what makes them different. What they cannot see is whether that difference actually protects them from competition.
Bruce Greenwald's research at Columbia Business School, documented in "Competition Demystified" (with Judd Kahn), confirms that sustainable competitive advantages are far rarer than companies claim. True moats are rare.
Warren Buffett puts it simply: a moat allows a business to earn above-average returns on capital over time. Not for a quarter. Over time, through cycles, despite competitors trying to take your customers.
Hamilton Helmer's "7 Powers" identifies seven distinct types of competitive advantage. But before categorizing your moat, you need to know if you have one at all.
Here are three questions that separate real moats from comfortable illusions.
Question 1: Would your customers pay 10% more?
This is the pricing power test. It reveals whether customers buy from you because you deliver unique value or because you happen to be convenient and affordable.
Run this thought experiment honestly. If you raised prices 10% tomorrow, what percentage of customers would leave? Not complain. Churn.
If the answer is more than 20%, you are likely competing on price without a structural cost advantage. That is fragile. Competing only on price works when you have genuine cost leadership from scale or process efficiency. Think Costco or Ryanair. Their low prices stem from structural advantages competitors cannot replicate. But if your edge is simply discounting, someone can always discount more.
Businesses with real moats often discover they have been underpricing. Customers would pay more because switching costs are high or because the product is embedded in their workflow.
The thought experiment is a start, but you can test this rigorously. Run a controlled 5 to 10 percent price increase on renewals. Track net revenue retention, gross dollar churn, and downgrade rates by cohort. The data will tell you what customers actually value.
Consider a B2B design tool integrated into customer build pipelines. After a 7% price increase, churn stayed below 3%. Re-implementation costs and retraining made switching painful. That is a real moat.
Question 2: Can a competitor replicate this in 12 months?
This is the durability test. It separates temporary advantages from structural ones.
Many businesses have advantages that feel significant but can be copied quickly. A better website. A friendlier sales team. A marketing angle. These create short-term differentiation. They do not create moats.
Real moats take years to build and cannot be bought with money alone.
Network effects in two-sided markets grow non-linearly: more buyers attract more sellers, which attracts more buyers. New entrants cannot buy this overnight.
Scale economies accumulate through millions of transactions that optimize processes in ways a new entrant cannot replicate by simply raising capital.
Switching costs build when customers invest time, data, and workflow integration that makes leaving painful.
Counter-positioning occurs when your business model creates value that incumbents could copy only by damaging their core economics. This is not about price. It is about economics incumbents will not copy. A subscription challenger undercuts a reseller model. Incumbents hesitate because matching would erase their partner margins. Netflix built streaming that Blockbuster could not match without cannibalizing store revenue.
Ask yourself: if a well-funded competitor started today with €10 million and the explicit goal of copying your business, where would they be in 12 months?
Build a simple matrix with three columns: capital required, time to parity, and non-copyable assets (proprietary data, exclusive contracts, regulatory approvals). If credible entrants can reach parity inside 12 months, you are renting the position, not owning it.
Question 3: Is the advantage in the business or in you?
This is the dependency test. It matters most for SMEs and founder-led companies.
Many small businesses have real advantages. But those advantages live in the founder's head, the founder's relationships, or the founder's daily decisions. When the founder leaves, the advantage walks out the door.
This is why acquisitions so often destroy value. The buyer pays for a moat that evaporates the moment the seller cashes the check.
Test this by asking: if I disappeared for six months, would the business maintain its competitive position? Would customers stay? Would the team make the same quality decisions?
If the answer is no, you do not have a business advantage. You have a personal advantage. That is valuable, but it is not transferable, and it should not command a premium multiple in a sale.
The solution is systematically transferring what creates advantage into organizational capability: documented decision frameworks, multi-threaded customer relationships, playbooks for critical processes, and institutional knowledge in systems rather than heads.
Key milestones: top 20 accounts multi-threaded, 10 critical decisions codified, pricing guardrails documented, operating cadence running without founder.
This takes time. Often 12 to 24 months in SME services, longer for complex B2B.
How to apply this
Score your business honestly on each question:
Pricing power test (0-10): Could you raise prices 10% and retain 80%+ of customers?
- 8-10: Yes, customers value us beyond price
- 5-7: Some customers would stay, others would leave
- 0-4: We compete primarily on price without structural cost advantage
Replication test (0-10): Could a funded competitor match you in 12 months?
- 8-10: No, our advantage took years to build and cannot be bought
- 5-7: They could get close but not equal
- 0-4: Yes, with enough capital they could replicate us
Dependency test (0-10): Would the advantage survive without the founder?
- 8-10: Yes, it is embedded in the organization
- 5-7: Partially, some elements would transfer
- 0-4: No, it depends on specific people
Two numbers matter: average and floor.
Average the three scores for overall moat strength. But also look at your lowest score. If any score is 4 or below, treat as "no moat yet" until remediated.
- Average 8 to 10, floor above 4: Real moat. Protectable, transferable, valuable.
- Average 5 to 7, floor above 4: Partial moat. Work needed to strengthen it.
- Any score at 4 or below: No moat yet. That weakness will surface in diligence.
This maps directly to the Intrinsic Advantages element in systematic quality assessment: moat type, barrier sustainability, pricing power, and market position durability. Businesses scoring below 7 on this element rarely pass our investment threshold.
What this means for buyers and sellers
If you are buying, run these three tests during diligence. Do not accept the seller's narrative. Verify through customer conversations, competitor analysis, and operational review.
If you are selling, know your real score before going to market. A 6 positioned as a 9 will collapse in diligence. A 6 positioned honestly, with a clear plan to reach 8, tells a credible story.
If you are building, use these questions quarterly. They reveal where to invest and where to stop pretending.
Real moats are rare. That is what makes them valuable. The first step to building one is admitting whether you have one today.
