As Charlie Munger often said:
“Take a simple idea, and take it seriously.”

This is exactly what we do in the first module of the Pareto MBA. It's called "Business Basics" and covers the most important aspects of what it means to be a good business. In order to understand what we mean by that, and to make learning during the rest of the program as efficient as possible, we introduce a number of key concepts in this module: moats, margins, pricing, value, value chains, stakeholders, and much more.

Many of these key concepts will also keep coming back during the program. One of those is the idea of moats, which is closely tied to the concept of margins. So when we have a first look at financial statements in this module – in a very practical way, without jargon and without needing to know anything about finance beforehand – we identify where to look in a company's financial statements to find different margin measures, and we talk about how that's tied to moats. Hint: sustained (or increased) margins over time often indicate a moat – so that's something we should be looking for as a business.

Moats and margins are connected to pricing, since if we follow the logic further, we need to understand how we can sustain or increase a company's margins over time. One of the ways is through pricing. Companies often hesitate to increase prices, maybe because they are afraid of losing customers. Keep in mind however that a business needs to raise prices at least as much as the inflation rate, otherwise its pricing in real (=inflation-adjusted) terms decreases over time.

Conversely, if a company increases prices by more than inflation, or by more than the market in general, it can learn a lot about its products and its customers. Increasing the price stress-tests the sustainability of its customer base and by extension of its revenues, and forces it to think hard about the value it's providing to its customers. If customers leave because of a price increase, then probably the product or service provided by the company wasn't that valuable in the first place, implying at the same time that the company might need to increase the value it provides.

Customers leaving also indicates that the company didn't have a strong moat to begin with. A moat is defined as a sustainable competitive advantage. It might be due to scale, switching costs, a strong brand, network effects, or access to something others don’t have, like superior technology. Without a moat, competitors will start eating your lunch. With a moat however, you get to run your business more profitably for a longer period of time.