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This week, we continue exploring how to build moats — and what that means for TechBio companies.
In his 2016 book 7 Powers: The Foundations of Business Strategy, Hamilton Helmer looked at companies like Netflix and Pixar and developed a toolkit to create Power and build moats.
In Part 1 of this series, I talked about founder–market misfit. Last week, I answered the question of how to choose your powers.
This week — we talk about Switching Costs.
Let’s get it on.
The 7 Powers in Short
Scale Economies — Unit costs decline as production volume increases due to fixed cost spreading and operational efficiencies. Barriers rise when competitors can’t match your volume economics.
Network Economies — Product value increases as more users join the network. Each additional user makes the product more valuable for everyone. See The Network Effects Bible for a detailed treatment of the different kinds of network effects.
Counter-Positioning — A newcomer adopts a superior business model that incumbents can’t copy without damaging their existing business. The incumbent faces a “damned if you do, damned if you don’t” dilemma.
Switching Costs — Customers face high financial, time, or risk costs when changing suppliers, keeping them loyal even when alternatives exist.
Branding — Customers attribute higher value based on reputation and trust, not just product features.
Cornered Resource — Exclusive access to a critical asset (data, talent, IP, relationships, raw materials) that others can’t easily obtain.
Process Power — Organizational capabilities and methods that enable superior operations and are difficult for competitors to replicate — often built through years of learning and refinement.
Switching Costs
During the growth stage of your company, you may be able to create high switching costs for your customers. They don’t have to like you. Usually, the best you can do is for your captive customers to tolerate you.
What do you expect? After all, you’re holding them captive.
Let’s look at two examples of companies that created high switching costs for their customers — one in enterprise software (SAP) and one in healthcare (Flatiron Health).
SAP
My friend Ariella plays baritone sax in the Thelma Yellin Alumni Big Band. We sit next to each other in the band and ride to rehearsals together — we’re neighbors in Modiin.
Ariella implements SAP projects for very large enterprise customers. She works with the client, designs the implementation, and handles project management and maintenance. She has deep technical knowledge of SAP and leads a programming team that turns that knowledge into working systems.
Every week, Ariella shares a new episode with me on the ride into Tel Aviv. The story always goes something like this:
The IT company salesperson sells a fixed-price implementation (mid to high 7-8 figures). They lose money on the fixed-price project — but after delivery, they enter the endless loop of change orders and enhancement requests. The customer is locked in. That’s where the IT company makes the real money. And that’s where Ariella uses her people skills and knowledge of SAP to navigate the changes and the organizational politics.
SAP was founded in 1972 by five former IBM engineers in Germany.
SAP exemplifies extreme switching costs through deep enterprise integration. Their ERP software becomes the central nervous system of organizations, handling everything from finance to supply chain management. Once implemented, SAP creates technological lock-in through custom configurations, extensive employee training, and complex data migrations that can cost millions and take years.
The switching process involves not just software replacement but complete business process reengineering. This creates a powerful moat — customers remain trapped even when dissatisfied, generating recurring revenue streams. SAP deliberately designs complexity that makes departure prohibitively expensive, ensuring customer retention through economic necessity rather than satisfaction.
Fifty-two years later, SAP’s 2024 revenue was €34.18 billion, up 25% from 2023. The company employs more than 100,000 people globally.
The moat works.
Our next example was a guest on my podcast.
Flatiron Health
Flatiron collects and learns from real-world data to improve people’s experience with cancer through better-designed clinical trials, faster drug development, and more effective care.
Flatiron has two moats: Switching Costs and Network Economics.
They started by doing something non-scalable. During the first few years, they assembled an army of clinically trained professionals — nurses and cancer data specialists — who manually reviewed patient records to extract meaningful insights. This helped transform messy, unstructured oncology data into structured, usable information at scale. Over time, they combined this human expertise with their own software tools to handle millions of data points more efficiently.
But millions of data points weren’t enough. Their pharma customers said, “We like what you’re doing, but you don’t have enough patients in your database.” So Flatiron acquired an EMR system for community oncology clinics.
The community oncology EMR system brought far more patient-level data into the Flatiron platform. Over time it created both switching costs and network effects:
Network economics: A data flywheel — more sites → more data → more value for pharma → better trials → better outcomes.
Switching costs: The community oncology EMR system is free for sites and pay-for-performance for sponsors. This created high switching costs for both clinics and pharma customers, who now rely on access to vast, live, real-world datasets.
In 2018, Roche acquired Flatiron Health for $1.9 billion after holding a 12.6% equity stake.
Today, Flatiron runs as a wholly owned and independent subsidiary of Roche, continuing to grow with its two moats: switching costs and network economics.
Moats work.
When to Build Switching Costs
You can start thinking about switching costs in the growth stage of your company. Early on, your priority is proving value — not trapping customers. Build switching costs only after you’ve achieved product–market fit and recurring use. If customers must use your product, then you can safely make it expensive to leave. Before that, focus on moats like Cornered Resource or Process Power that strengthen your core value creation.
Remember that not everyone is SAP.
It sounds simple in theory — but it’s one of the hardest decisions a founder can make. Building switching costs requires deep clarity about your technology, go-to-market motion, customer behavior, industry dynamics, and roadmap. One wrong step, and you risk losing the very customers you’re trying to retain.
This Week on Life Sciences Today — Carta Healthcare
My guest this week was Aaron Brouser, GM Life Sciences at Carta Healthcare. Aaron and I talked about how they create a competitive moat using switching costs.
Former MModal executive Aaron Brouser is tackling healthcare’s massive inefficiency problem with LLM technology that extracts clinical insights from unstructured medical notes. After MModal’s $1B+ acquisition by 3M, his next startup, Realyze Intelligence merged with Carta Healthcare in 2024.
Their core innovation for hospitals and health systems is automated pre-visit screening that continuously monitors patient records for clinical trial matches — delivering 20× efficiency improvements, reducing screening time from hours to minutes per patient.
By embedding directly into EMR systems, Carta creates switching costs: once physicians rely on their screening alerts, changing vendors disrupts established workflows.
🎧 Listen to the episode: Hybrid Intelligence with Carta Healthcare
🌐 Visit Carta Healthcare
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I’m a 5× founder who learned hard lessons the hard way.
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