Brand Moat Explained: How Companies Charge Premium Prices and Keep Customers

In my last post, we looked at the cost advantage moat — how being the lowest-cost provider can protect profits.

But there’s a tradeoff. Competing on price often means thinner margins.

This week, let’s look at the opposite approach: companies that can charge more and still keep customers.

That’s the power of a brand moat.

WHAT IS A BRAND MOAT? HINT: IT’S NOT JUST A FAMOUS COMPANY NAME OR LOGO.

You might assume that a company with a brand moat is just one that has an easily recognizable name or logo. But not so fast. Brand fame and brand moats are two different things.

The difference matters more than most investors realize.

BRAND FAME VS. BRAND MOAT

Take a look at Chevron and Texaco, for example. You might instantly recognize them as gas station brands and may even picture their logos. They definitely have brand fame, but they don’t really have brand moats.

If a competitor sells gasoline for $2 less per gallon, they can easily steal business from Chevron and Texaco. Customer loyalty isn’t strong. With commodities, such as gasoline, price is the primary driver of business, not the brand itself.

Companies with true brand moats create loyalty that goes beyond price. And that kind of loyalty shows up in surprising ways.

REAL-WORLD BRAND MOAT EXAMPLES

You know how some sports teams have incredibly loyal fans who buy season tickets and proudly show off their jerseys even through losing seasons? Companies with brand moats can have similar lifelong, devoted customers, who will proudly show off the company’s products.

This loyalty comes from an emotional connection with that company and its products. Or it can come from an image or feeling that is conjured when you hear the company’s name.

Let me explain.

STARBUCKS AND PREMIUM PRICING POWER

When Starbucks first came on the scene, critics said it would struggle because its coffee was too expensive. Before Starbucks, coffee was considered the cheap morning pick-me-up of the everyday man.

You ordered a medium coffee.

Starbucks changed the framing. Now you ordered a grande latte.

One evokes images of blue-collar workers in donut shops. The other sounds imported, cultured, maybe even a little sophisticated.

It was still coffee — but the perception changed. And perception is where brand moats are built. Walking around with a Starbucks cup in hand became a minor status symbol.

Customers were willing to pay more for that perception of sophistication. That’s pricing power in action.

“Getting a Starbucks” became a synonym for getting coffee in general, much like Coke is synonymous with cola beverages. That level of cultural shorthand is often a sign of a brand moat. And it all came from the feeling the brand created in its customers.

But not every brand moat is built on status or emotion.

GOOGLE AND BRAND DOMINANCE IN SEARCH

Sometimes a company doesn’t have to create an emotional connection with its customers to build a moat. Instead of “love” for the company, its moat can be based on trust and predictability.

Good branding can create a psychological shortcut for consumers. It reduces the time, effort, and cost for consumers to find a product that meets their needs.

Google, for example, is another company whose name became synonymous with its product—online search. There are other search engines that exist, but most people automatically just turn to Google. To be sure, Google actually has several economic moats, including network effects, but its brand reinforces its competitive advantage.

WALMART’S BRAND AND LOW-PRICE ASSOCIATION

Interestingly, Walmart also has a brand moat in addition to its cost advantage moat. There’s no status symbol that comes with shopping there, but Walmart’s name is associated with low prices and a wide selection of goods. It’s the first store that comes to mind for many when they need a common household item.

But even strong brand associations can erode over time.

WHEN A BRAND MOAT WEAKENS

As with all economic moats, a brand moat can weaken. This can happen when the company deliberately or unintentionally changes its emotional connection with its customers. Or it happens when the psychological shortcut it created starts to blur.

HAS STARBUCKS LOST ITS BRAND EDGE?

Starbucks has faced pressure on its brand positioning in recent years. Its association with coffee culture isn’t the same as before, as rivals, such as Dutch Bros, have taken some market share.

Originally, it marketed its stores as a “third place” to socialize at between home and work. People wanted to hang out in Starbucks stores. That strengthened the emotional connection it had with customers.

Over the years, however, Starbucks moved away from the “third place” strategy, focusing more on getting orders out as quickly as possible. They’ve gone from selling a status symbol to simply selling coffee.

UNDER ARMOUR AND BRAND DILUTION RISK

Under Armour is another company whose star has fallen. They had a cool name and logo, and big-name athletes were sporting their gear. Consumers connected with their underdog image and wanted to wear the clothing.

Under Armour looked like it would be the next Nike when it came to performance apparel. But when Under Armour expanded into Kohl’s in 2017, it blurred its premium positioning. Once a performance brand, it began to feel like just another discount rack option.

The mid-tier, discount department store was associated with wallet-conscious moms and dads. By association, Under Armour lost its edginess with younger consumers. It also lost its pricing power. Why pay full price when you can use a coupon at Kohl’s?

At one point, it seemed like both companies looked unstoppable. They’ve since seen their moats shrink and have been trying to rebuild their brands over the past several years.

HOW TO IDENTIFY A TRUE BRAND MOAT

Investor Warren Buffett once said, “It takes 20 years to build a reputation and five minutes to ruin it.”

Buffett was referring to the need for integrity and high ethical standards in his managers when he said it. But I think it applies to brand moats as well.

I’ve lost money before in companies whose brand moat dried up quicker than I realized. Most of those came in the fashion retail industry, where trends can be very fickle.

So, how do you actually identify a brand moat in a stock before investing?

QUESTIONS TO ASK BEFORE INVESTING IN A BRAND STOCK

Fortunately, I’ve learned from previous mistakes. Now, to lower my risk, I ask myself:

• Why do people connect with this company?

• How strong is the emotional connection?

• Is the company’s name synonymous with its product?

• Does the brand resonate with younger consumers?

• Is the brand getting stronger or weaker?

Personally, the brand moat is one of my favorite moats because of the devoted customer base and pricing power. Brand moats can be powerful. But they’re fragile.

For that reason, I usually like it when a company has another moat or two in addition to a brand moat. I look at brand moats as more of a power boost than a standalone moat.

As investors, our job isn’t to fall in love with brands — it’s to determine whether customers still are. The stock price will eventually follow the strength—or weakness—of that connection.

Next, we’ll explore another moat that doesn’t rely on emotion at all — and may be even harder for competitors to break.

See you at the finish line!

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Disclaimer: I may hold shares of some of the companies mentioned. I’m not a licensed financial professional. This blog shares my personal experiences and opinions around money, investing, and early retirement. It’s for informational and educational purposes only—not financial, legal, or tax advice. Always do your own research or consult with a qualified professional before making any financial decisions.