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Updated: July 16, 2022 @ 11:02 am
When it comes to moats, most investors think of advantages like network effects or superior brand recognition. And while those are both very strong competitive edges, there is one underrated moat that can create an incredible advantage for many of today’s high-growth companies.
It’s called switching costs.
Think of switching costs as the hoops a customer has to jump through to switch to a competitor’s product. It could be as simple as paying a fee to get out of a contract like with cellphone service providers or as complicated as reorganizing an entire company’s internal processes when switching integral software products like customer relationship management (CRM) tools.
The harder it is to switch, the wider the moat.
Image source: Getty Images.
Let’s take a look at how switching costs provide a competitive advantage in the following industries and companies:
Apple (NASDAQ: AAPL) has some of the strongest switching cost advantages of any company.
On numerous occasions, Samsung has released smartphones with superior features to the iPhone, and yet few choose to make the switch. While branding certainly plays a role, switching costs are an enormous factor in this retention.
To change phones, you’d have to navigate the complex process of transferring your photos and other data from the Apple ecosystem to Android. You’d also have to learn an entirely new operating system in a time when most people depend on their phones on a day-to-day basis for both work and their personal lives.
Lastly, by switching, you would lose the convenience of having your phone seamlessly integrate into the Apple device ecosystem. For those who have invested in more than one Apple device, this is a big hoop to jump through. And with over a billion devices sold, that represents a big chunk of Apple customers.
iPhone users know from experience just how difficult it can be to switch to a non-Apple phone. This barrier to change embodies the power of switching costs and is in no small part why Apple has dominated the industry for many years.
Software-as-a-Service (SaaS) companies are some of the biggest benefactors of switching costs, particularly those that serve enterprises. The deeper the integration of the SaaS solution into the daily operations of a company, the more difficult it is for the customer to switch.
This is because, even if a competitor offers a similar service at a lower price, the business will have to leverage its IT team to deploy the new software and migrate any data needed from the old platform. Once that’s complete, they’ll have to train the staff on how to use the new software and go through a period of reduced efficiency while the entire transition takes place.
That process is extremely complex and highly time-consuming. Most organizations would rather stick with their current software provider than go through all that. This makes quality enterprise software products extremely sticky and gives these companies significant pricing power.
This stickiness is evident in the market-beating returns of the major SaaS leaders. Consider the 10-year returns of Salesforce (NYSE: CRM), Adobe (NASDAQ: ADBE), Microsoft (NASDAQ: MSFT), and ServiceNow (NYSE: NOW) vs. the S&P 500 over the same period:
CRM Total Return Level data by YCharts.
As these software companies continue to add additional products and services, they further engrain themselves into the core operations of their clients, only strengthening their moats.
A high dollar-based net retention rate (above 100%) gives investors an indication of the quality of the product and the strength of the company’s switching costs.
While the medical device industry can be poorly covered by the financial media, it offers one of the best opportunities for high switching costs.
This is because healthcare providers such as doctor’s offices and hospitals have the luxury of largely disregarding cost since it’s passed onto the patient and insurance companies. This means they are mainly focused on the functionality of the devices, and if such devices work well, healthcare providers are loath to switch to a competitor.
This can be seen in Masimo‘s (NASDAQ: MASI) domination of the pulse oximeter market (those electronic clips that go over your finger to measure your blood oxygen level).
Their devices are found in 90% of the top hospitals in the U.S., and there is little reason for medical facilities to switch to a competitor because they are state-of-the-art and are ultimately paid for by the patients and their insurance providers.
As the economy seems to be worsening, brand loyalty alone will begin to lose its pricing power. When people’s wallets get tight, they are likely to start trading in their $5 Starbucks (NASDAQ: SBUX) lattes for cheap, home-brewed Joe.
But the pricing power found in switching costs is strong enough to endure an economic downturn. Switching coffee is easy, but a multibillion-dollar corporation changing its payroll software is a whole other story.
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· Air Products and Chemicals Inc.’s chosen warehouse developer, Prologis Inc., will have to wait until July 13 for a final decision by Upper Macungie Township’s zoning hearing board on 2.61 million square feet of warehouses.
· Chubby’s of Southside Easton has added Krispy Krunchy Chicken to its offerings and name.
· Curaleaf Holdings Inc., which operates in the U.S. and Europe, will open a medical-marijuana dispensary at 1801 Airport Road, Hanover Township.
· Habitat for Humanity, which has “ReStores” that sell new and lightly used furniture, has leased 30,000 square feet at the South Mall.
· Nat Hyman’s bid to convert an old warehouse at 938 Washington St. in Allentown into 48 apartments did not win zoning hearing board approval this week after neighbors said more housing would make an on-street parking shortage worse.
· Members 1st Federal Credit Union opened a new branch this week at 5605 Hamilton Blvd, Trexlertown. It’s one of five planned for the Lehigh Valley.
· A Turkish restaurant has relocated from one downtown to another, taking its fresh ingredients and cozy atmosphere from Nazareth to 200 Main St., Tatamy.
· The Tennessee Titans have chosen Allentown-based Shift4 Payments to handle payments at Nissan Stadium.
· Wells Fargo Bank held ribbon-cutting at its downtown Allentown branch at 740 Hamilton St.
· The Wiz Kidz outlet at the Madison Farms residential/retail development in Bethlehem Township will hold a grand reopening and ribbon-cutting at noon on July 15.
· Bad Biscuit Company, which offered breakfast with scratch-made biscuits, freshly baked pastry and local, small-batch artisan coffee, said it will cease operations at 16 Columbia Ave. in Reading after its July 1 hours.
· FastBridge Fiber has announced it will build an all-fiber cable network that will offer ultra-fast internet in the Reading area.
· Hamid Chaudhry has said he no longer plans to move forward with pursuing a food truck park he previously proposed on the site of the former Sheetz convenience store and gas station in Exeter Township at 6600 Perkiomen Ave. (Route 422 East).
· The Maxatawny Township Planning Commission has OK’d a proposal for a Mavis Discount Tire store in the Kutztown Road shopping center that features a Giant supermarket.
· Valentino’s Italian restaurant has gotten Maxatawny Township’s approval to remain open when the state transportation department takes one-third of its parking lot to build a traffic roundabout at the intersection of Route 222 and Long Lane.
· Pocono Mountain Harley-Davidson, under new ownership, will hold a “Grand Re-Opening Bash” July 9 and July 10 from 10 a.m. to 5 p.m.
· Sauce West End plans to open in a former Rita’s Italian Ice, just off Route 209 across from the Tractor Supply store in Brodheadsville.
· The Surgery Center of Pottsville, which offered medical procedure services for 16 years in Cressona Mall. will close June 28.
· Wells Fargo has closed its branch office in Langhorne, near the intersection with Maple Avenue.
· The latest PrimoHoagies location in New Jersey held a grand opening at 1930 State Route 57, Hackettstown.
· A new Tractor Supply Co. store in Warren County will have its grand opening in the former Toys ‘R’ Us store in Pohatcong Plaza on July 9.
· Hunter Pocono Peterbilt plans to move Pocono Township operations to Stroudsburg.
· Coal Winery and Kitchen at 81 Broad St., Bethlehem, has closed as its owner searches for a new location for the business, according to its Facebook page.
· Lowhill Township supervisors approved a 312,120-square-foot commercial warehouse and distribution center on a 43.4-acre tract on the west side of Route 100, south of the Kernsville Road intersection.
· The Mint Gastropub at 1223 W. Broad St., Bethlehem, announced that it has temporarily closed to undergo a merger with a “well-known restaurant group” from Bethlehem.
· The Slatington Farmers Market opened its 28,000-square-foot showroom, which includes space for 53 vendors, as well as a 4,000-square-foot event space.
· St. Luke’s University Health Network opened a new pediatric inpatient unit next to the eight-bed pediatric intensive care unit at St. Luke’s University Hospital – Bethlehem.
· 25th Asian House opened at the location of the former Tin Tin Chinese restaurant in the 25th Street Shopping Center in Palmer Township.
· The Chick-Fil-A in Broadcasting Square shopping center in Spring Township was razed to make way for a new, expanded facility for the popular chicken sandwich restaurant.
· Plans for drive-thru locations of a Chipotle and a Starbucks at the intersection of Ivy League Drive and Kutztown Road were rejected by Maxatawny Township planners.
· Cumru Township plannes reviewed preliminary plans for NorthPoint-Morgantown Commerce Center, a 738,720-square-foot warehouse to be built on 75.2 acres at Morgantown Road (State Route 10) and Freemansville Road.
· Kutztown University has plans to expand its historic Poplar House to 13,161 square feet with an addition around its side and back, but keep the 129-year-old structure intact.
· A wine store and beverage outlet could be coming to a new two-unit building along the commercial strip of Blakeslee Boulevard Drive East in Lehighton, Carbon County.
· ChristianaCare, a Delaware health care organization, has announced it will buy the former Jennersville Hospital in West Grove, Chester County.
· Garden of Health Inc. celebrated the opening of the food bank’s new warehouse at 201 Church Road, North Wales, in Montgomery County.
· Silverline Trailers Inc. opened its first location in Pennsylvania and in the Northeast at 223 Porter Road, Pottstown, where it sells utility, cargo, dump, equipment and car hauler trailers.
· A new smoothie and bowl restaurant, Sips & Berries, opened at 285 Maple Ave., Harleysville, in Montgomery County.
· Terrain on the Parkway offers 160 new 1-, 2- and 3-bedroom apartments at 1625 Lehigh Parkway East in Allentown.
· Lehigh Valley native Don Wenner is moving his real estate investment and finance firm DLP Capital from Bethlehem to Allentown at 835 W. Hamilton St.
· While Wells Fargo has been the leader in closing banks lately, it will hold a ribbon-cutting for its new downtown Allentown office at 740 Hamilton St. on June 30.
· If you’re in the market for sterling silver jewelry, minerals and semi-precious gemstones, C& I Minerals is now operating at the South Mall at 3300 Lehigh St. in Allentown.
· The Allentown-based utility company PPL Corp. bought a major Rhode Island utility.
· Ownership at Martellucci’s Pizzeria in Bethlehem has changed, but Paul and Donna Hlavinka and their family are running the pizza place at 1419 Easton Ave., just as it has been operated for 49 years.
· Dr. Jacob Kasprenski’s new Kasprenski Family Eye Care opened at 1088 Howertown Road, Catasauqua.
· Josie’s New York Deli in downtown Easton closed early in the COVID-19 pandemic, but a June 13 Historic District Commission meeting approved a request for a new sign at its building at 14 Centre Square.
· Zekraft cafe has opened its second location in the Easton Silk Mill in Easton. The first Zekraft restaurant was opened in Bethlehem. The restaurants’ menus change frequently, with a focus on local ingredients.
· Manta Massage at 319 Main St., Emmaus, will hold its grand opening on July 10 starting at 11 a.m.
· The former Iron Lakes Country Club, constructed in the late 1950s and early 1960s, will operate at 3625 Shankweiler Road in North Whitehall Township under its new name, The Club at Twin Lakes.
· Prologis, a titan in the logistics industry, will own and operate three warehouses proposed in Upper Macungie Township at the former Air Products headquarters campus at 7201 Hamilton Blvd.
· Lehigh Valley Health Network ceremonially opened its first Carbon County hospital — a $78 million, 100,578-square-foot facility at 2128 Blakeslee Boulevard Drive East in Mahoning Township.
· Pocono Township commissioners voted to accept Swiftwater Solar’s preliminary final plan for the $111 million, 80-megawatt field on a private 644-acre site on top of Bear Mountain that would include about 200,000 solar panels.
· Firetree Ltd. wants to expand its in-patient rehab operation at the former Sands Ford auto dealership at 440 N Claude A Lord Blvd. (Route 61), Pottsville.
· A Dunkin’ in Schuylkill County located at 400 Terry Rich Blvd., St. Clair, has become just the fourth location of the donut and coffee chain to go entirely digital.
· The Conservatory music school in Bucks County will close after 34 years, and school officials say the COVID-19 pandemic is the cause. The nonprofit, located at 4059 Skyron Drive, Doylestown, will close June 30.
· A Popeyes Louisiana Kitchen and Arby’s will be built on the site of the former Ahart’s Market on Route 22 in Phillipsburg, New Jersey.
· Hunterdon County Chamber of Commerce offices and the Unity Bank Center for Business & Entrepreneurship will be located at 119 Main St., Flemington.
· Honeygrow opens Quakertown location, next to Chipotle on Route 309, on June 3.
· Dunkin’ reopens remodeled restaurant at 1174 MacArthur Road in Whitehall Township
· Muse Modern Med Spa at 325 Fifth St. in Whitehall Township will hold a grand opening June 4.
· Around Again, a consignment store, opened at 154 S. Main St., Phillipsburg
· Steak and Steel Hibachi, a restaurant in the works at 44 W. Walnut St., Bethlehem, still plans on opening late this summer.
· Take It Outdoors Recreation Hub has moved to a spot along the Schuylkill River Trail at Riverfront Park in Pottstown, Montgomery County
· Pedego Electric Bikes has a new outlet in Lambertville, N.J. at 13 N. Union St.
· Amanda Vachris has opened a new Keller Williams Real Estate office at 15 St. John St. in Schuylkill Haven.
· Easton’s new West Ward Market will open Wednesday and be open on Wednesday’s through the summer from 3 p.m. to 7 p.m. The market, created by the Greater Easton Development Partnership, will sell fresh produce on 12th Street, next to Paxinosa Elementary School.
· Ciao Sandwich Shoppe is adding a second location, this time on College Hill in Easton. Ciao plans to open at 325 Cattell St. in late summer. Ciao already operates in downtown Easton at 12 N. Third St
· Ma’s Crepes and Cakes will hold a grand opening and ribbon-cutting June 16 at 46 W. Broadway, Jim Thorpe. The celebration starts at 5 p.m., with the ribbon cutting at 5:45 p.m.
· Bethlehem’s Back Door Bakeshop will reopen as a wholesale operation at 7 E. Church St. in the city’s historic district. The business was open for nine years as a retail outlet at Broad and Center streets, before announcing in March that it would close the storefront April 3 and “go back to its origins as a wholesale business.”
·The Beef Baron on Catasauqua Road in Bethlehem is closed indefinitely for renovations
· The Brothers That Just Do Gutters are opening a new location in Allentown at 1302 N. 18th St.
· St. John Chrysostom Academy, an Orthodox school serving grades 1-9 starting this fall, held a grand opening at its St. Francis Center, Bethlehem, campus.
· Easton Commons, a shopping center anchored by Giant Foods at 2920 Easton Ave., Bethlehem Township, has a new name: The Shops at Bethlehem.
· Carbon County is getting a taste of Brazil at Uai Brasil BBQ at 315 Lehigh Ave. in Palmerton.
· The Keystone Pub in Bethlehem Township, at 3259 Easton Avenue, has reopened after a lengthy and expensive renovation.
· The Trading Post Depot opened at 401 Northampton St., Easton. The rustic furniture store makes custom tables for dining rooms, desktops, conference centers and more.
· The Easton area has a new gym: Homemade Fitness at 444 Cedarville Road in Williams Township.
· Il Gaetano Ristorante opened at its 665 Columbus Ave., Phillipsburg, location.
· Ciao! Sandwich Shoppe to open second location on College Hill in Easton, replacing The Kettle Room
· Rene and Grisellies Benique have opened Ezekiel 47 Cafe at 10 S. Fifth Ave., off Fifth and Penn avenues, in West Reading.
· Alter Ego Salon and Day Spa in Emmaus is holding a grand opening Sunday, May 22, from 11 a.m. to 3 p.m., with a ribbon cutting at noon.
· Origen Latin Fusion has opened at the site of the former Tomcat Cafe in Sinking Spring, Berks County.
· Sellersville Senior Residences will hold a ribbon-cutting ceremony May 24. The Bucks County affordable-housing community for adults 55 and older has 50 apartments, with eight allocated for people with behavioral health needs.
· The House and Barn in Emmaus has opened its Shed outdoor dining and cigar bar area. The House and Barn is at 1449 Chestnut St. in Emmaus.
· Realtor Amanda Vachris and the Schuylkill Chamber of Commerce will hold a ribbon cutting at Vachris’s new Keller Williams Real Estate office at 15 St. John St., Schuylkill Haven, at 4 p.m. on May 24.
· Il Gaetano Ristorante will hold a grand opening on Friday, May 20, at 5:30 p.m. The 665 Columbus Ave., Phillipsburg.
· First Commonwealth Federal Credit Union will hold a grand opening at its new headquarters in Trexlertown, 6126 Hamilton Blvd., on May 18.
· Vinyl Press Signs & Graphics has relocated within Emmaus. The new site is 15 S. Second St., not far from the former Sixth Street location.
· Pedro’s Cafe in Emmaus to close
· SV Sports (formerly Schuylkill Valley Sports) to close Quakertown location
· Flemington DIY will host a Grand Re-Opening on May 14 at 26 Stangl Road, Flemington. The celebration will kick off at 10 a.m.
· Elpedio’s Ristorante at Seipsville opened at 2912 Old Nazareth Road in Easton. The restaurant is open Wednesday through Sunday.
· Uai Brazil opened at 315 Lehigh Ave, Palmerton, offering both a seated or buffet option.
· Colombian Mex Restaurant opened at 107 E Union Blvd in Bethlehem, offering traditional Colombian cuisine.
· Precision Ink opened at 161 W Berwick St. in Easton.
· King Wing opened a location in Bethlehem at 129 E. Third St., serving wings and sandwiches.
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