(Economic Moat)
Before looking at numbers, an investor must understand how a company actually makes money and why it can continue doing so in the future.
This lesson helps you answer two critical questions:
- How does this business earn profits?
- What protects it from competitors?
What Is a Business Model?
A business model explains **how a company:
- Creates value
- Delivers that value
- Earns money consistently**
In simple words:
A business model is the story of how cash flows into the company.
If you don’t understand the business model, you are speculating, not investing.
Common Types of Business Models (With Indian Examples)
1️⃣ Product-Based Business
The company manufactures or sells physical products.
Examples:
- Tata Motors – vehicles
- Asian Paints – paints
- ITC – FMCG products
📌 Key questions to ask:
- Is demand recurring?
- Are margins stable?
- How strong is the brand?
2️⃣ Service-Based Business
The company earns by providing services.
Examples:
- TCS, Infosys – IT services
- HDFC Life – insurance services
📌 Key questions:
- How dependent is it on people?
- Can it scale without costs rising sharply?
3️⃣ Subscription / Recurring Revenue Model
Customers pay regularly (monthly/annually).
Examples:
- Telecom companies
- SaaS businesses
📌 Why investors like this:
- Predictable cash flows
- High visibility of future revenue
4️⃣ Platform / Marketplace Model
The company connects buyers and sellers and earns commissions.
Examples:
- Stock exchanges
- E-commerce platforms
📌 Key strength:
- Network effect (more users = more value)
What Is Competitive Advantage (Economic Moat)?
Competitive advantage means the ability of a company to protect its profits from competitors over time.
Warren Buffett calls this an “economic moat.”
A wide moat keeps competitors away and allows profits to grow sustainably.
Types of Competitive Advantage
🛡️ Brand Power
Customers trust the brand and are willing to pay more.
Examples:
- Asian Paints
- HUL
🛡️ Cost Advantage
The company produces at lower cost than competitors.
Examples:
- Large-scale manufacturers
📌 Result: Higher margins even in price wars.
🛡️ Switching Costs
Customers find it difficult or risky to switch to another provider.
Examples:
- Banks
- Enterprise software
🛡️ Network Effects
More users make the product more valuable.
Examples:
- Stock exchanges
- Payment platforms
🛡️ Regulatory or Licensing Advantage
Limited licenses protect competition.
Examples:
- Insurance
- Banking
How to Check If a Moat Is Real
Ask these practical questions:
- Are profits consistent over many years?
- Does the company maintain margins?
- Can competitors easily copy the model?
- Does the company have pricing power?
If answers are mostly yes, the moat is likely real.
Warning: Fake or Weak Moats
Be careful when:
- Profits depend only on low prices
- Growth is driven by discounts
- Margins collapse when competition increases
📌 A good business can still be a bad investment if the moat is weak.
Investor Mindset
✔ First understand the business ✔ Then study financials ✔ Only then think about valuation
Numbers tell what happened. Business models explain why it happened.
Key Takeaways
- Business models explain how money is earned
- Competitive advantage protects long-term profits
- Strong moats lead to sustainable returns
- Investing without understanding the business is risky