How to use the “7 Powers”: The Simple Way to Spot Great Businesses

You have picked your first ETF or stock. That is the hardest part done. Many people will be well served by low cost, diversified ETFs for most of their investing journey. (Zorroh – Investing 101; Zorroh – ETF Investing for Beginners)

What makes this business special enough to stay strong for years, not just months?

This is where 7 Powers, a framework by strategist Hamilton Helmer, becomes useful. It gives you a short checklist for spotting businesses with real, durable advantages, not just hype. (Source: Hamilton Helmer – 7 Powers; Sachin Rekhi – Primer on 7 Powers)

If any term feels unfamiliar (like gross margin or unit economics), there is a Jargon Cheat Sheet at the end of this post that you can skim and then come back.

What “Power” Really Means

In 7 Powers, Power means a durable edge: something real that lets a company earn better profits than its competitors for a long time. Not a nice logo. Not a one year growth spurt. An advantage that keeps helping the business even when rivals are trying to catch up. (Source: Nurole – 7 Powers Overview; Eagle Point Capital – 7 Powers Summary)

Helmer argues that almost all lasting advantages fall into just seven buckets.

• Scale economies: Being bigger makes each unit cheaper.
• Network economies: The product gets more valuable as more people use it.
• Counter positioning: A new model that incumbents hesitate to copy.
• Switching costs: Customers feel pain (time, money, hassle) if they leave.
• Branding: People happily pay more just for the brand.
• Cornered resource: Exclusive control of something valuable.
• Process power: A way of operating that others cannot easily copy.

For any stock you are looking at, you can simply ask:

Which of these seven, if any, does this company clearly have?

If the honest answer is “none”, the company is likely in a tough, commodity like business where extra profits get competed away. (Source: Edison – Seven Strategic Powers)

The 7 Powers in Plain English

Scale Economies: Bigger Is Cheaper

When a company has large fixed costs (factories, logistics networks, R&D) and millions of customers, its cost per unit falls as it grows. Smaller rivals often cannot match its prices or investment levels. (Source: Tyas Tunggal – 7 Powers Notes; Eagle Point Capital – 7 Powers)

Think of a global burger chain buying ingredients cheaper than a small cafe because it orders so much more. (Source: EatHealthy365 – How McDonald’s Uses Economies of Scale)

What to ask:

• As revenue has grown, have operating or profit margins generally improved over time?
• Do smaller competitors say they cannot compete on price with the leader?

Network Economies: More Users, More Value

Some products become more useful as more people or partners join. Social apps, marketplaces, and payment networks are classic examples. (Source: NFX – The 7 Powers Known to Tesla, Pixar, Netflix, Apple & Twilio)

• Social apps: more friends means more reasons to use them.
• Marketplaces: more buyers attract more sellers, which attract more buyers.
• Payment networks: more cardholders attract more merchants, and vice versa.

What to ask:

• Does each new user make the product better for existing users (more people to message, more listings, more acceptance points)?
• Does the industry tend to produce a few big winners rather than many small equal players?

Counter Positioning: A New Model Incumbents Fear To Copy

A newcomer uses a business model that the old giants could copy, but do not, because it would damage their existing profits.

Classic pattern: low fee online brokers versus traditional high commission brokers. Copying “zero commission trades” forces incumbents to blow up their main revenue stream until they can replace it. (Source: Brice Prigent – Counter Positioning)

What to ask:

• Is the new model clearly better or cheaper for customers?
• Would copying it force incumbents to hurt their core business?

Switching Costs: Too Painful To Leave

Customers face real costs, like time, money, lost data, or disruption, if they switch.

• A company might build its entire workflow, data, and staff training around one software tool. Changing tools is not just a download; it is retraining, migration, and risk.
• Ecosystems (devices plus services) can make leaving feel expensive and inconvenient.

(Source: Jeff Towson – Economies of Scale and Switching Costs)

What to ask:

• Would a typical customer say “I would like to switch, but it is a hassle or risky right now”?
• Do retention rates and subscription renewals look strong over time?

Branding: Same Product, Better Price

Sometimes the product itself is not fundamentally different, but the brand makes people willing to pay more.

• A logo on a shirt, bag, or pair of leggings doubles or triples the price versus a generic version.
• The brand stands for identity, trust, or status, not just fabric.

(Source: Maximizations – Apple’s Economic Moat; Maverick – Lululemon Marketing Strategy)

What to ask:

• Are prices meaningfully higher than generic alternatives, yet demand is strong?
• Are gross margins (see jargon section) higher and fairly stable compared to peers?

Cornered Resource: Owning The Key Ingredient

A company controls something others cannot easily get: unique data, patents, exclusive rights, or prime locations.

• A chip designer with key patents that competitors must license.
• A business with exclusive long term rights to valuable media or sports content.

(Source: Darius Writes – 7 Powers Notes)

What to ask:

• Is there a clear asset or right that rivals cannot just copy or buy in the open market?
• Does this show up as royalty income, negotiation leverage, or structural scarcity?

Process Power: Doing It Better, In A Way That Is Hard To Copy

The company has built internal processes (logistics, store operations, risk systems) that give it a lasting cost or quality edge, and that edge took years to build.

Global restaurant chains refine every detail of store layout, training, and supply chain so food is fast and consistent almost anywhere.

(Source: Eleganthack – Building Competitive Advantage with Seven Powers)

What to ask:

• Does this company reliably operate cheaper, faster, or better than similar businesses?
• Is that advantage tied to accumulated know how and systems rather than one piece of tech?

Practice: 7 Powers On Apple, Lululemon, And McDonald's

This is not investment advice. These are practice examples to help you see the 7 Powers in businesses you recognise.

Apple: Ecosystem, Brand, And Switching Costs (Tech)

Everyday experience:

• Your iPhone, Mac, Watch, AirPods, and iCloud all work together.
• Leaving Apple means moving photos, messages, apps, and habits to a whole new environment.

Likely powers:

• Switching costs: Apple’s ecosystem creates real friction if a user wants to leave: migrating data, losing group chats, buying new accessories, and learning a new interface. Owning multiple Apple devices multiplies the pain of switching.
• Branding: Apple has built a premium, design focused image. Many customers choose Apple even when cheaper alternatives exist, because of perceived quality, status, and trust.
• Scale economies: Apple spends heavily on chips, design, and services, but spreads these costs over hundreds of millions of devices, giving it performance and cost advantages that smaller rivals struggle to match.

(Source: Maximizations – Apple’s Switching Cost Moat)

Try answering:

• Would most users describe switching away from Apple as easy, or as effortful and annoying?
• Does Apple continue to charge premium prices and still sell well?
• Has its scale allowed more integration over time (for example custom chips and more services)?

Lululemon Athletica Inc.: Premium Brand In Activewear (Consumer Discretionary)

Everyday experience:

• Lululemon leggings and tops cost noticeably more than many sportswear alternatives.
• The brand is tied to quality, fit, and a particular lifestyle: studio classes, wellness, and community.

Likely powers:

• Branding: Lululemon has built a strong lifestyle brand around performance and community. Customers often accept premium pricing and see Lululemon as different from generic athleisure, even if basic materials can be similar.
• Some scale and vertical control: The company controls design, uses selected manufacturers, and sells heavily through its own stores and website, which supports both brand control and healthy margins.
• Evidence in margins: Commentators often highlight Lululemon’s gross margins in the mid 50s to around 60 percent, higher than many apparel peers, reflecting strong pricing power and product strategy.

(Source: Eightception – Lululemon Competitive Advantages; Social.plus – Lululemon Community Strategy)

Try answering:

• Are customers willing to pay significantly more for Lululemon when cheaper options exist?
• Do its gross margins look higher and more stable than generic sportswear brands?
• Does the brand feel aspirational and community driven rather than just another logo?

McDonald's: Scale, Processes, And The Golden Arches (Restaurants)

Everyday experience:

• McDonald’s is almost everywhere, usually cheaper than many sit down options, and tastes familiar in different countries.
• Service is fast and predictable.

Likely powers:

• Scale economies: McDonald’s is one of the largest buyers of key food ingredients worldwide, giving it purchasing power smaller chains cannot match. It also spreads marketing, technology, and product development costs across a huge global base of franchised and company owned stores.
• Process power: Over decades, McDonald’s has refined store layouts, food preparation systems, and franchise training to deliver speed and consistency. That operational know how is difficult and time consuming to replicate.
• Branding: The Golden Arches are globally recognised. For many families and travellers, McDonald’s is the default “safe” option in an unfamiliar place.

(Source: Research Methodology – McDonald’s Strategy and Advantage; Two Teachers – McDonald’s Global Dominance)

Try answering:

• Does McDonald’s size give it obvious cost and marketing advantages versus smaller chains?
• Could a local burger shop realistically copy McDonald’s operating system in a year or two?
• Does the brand reliably pull in customers almost anywhere in the world?

How 7 Powers Fits After “Your First ETF or Stock”

In your earlier post, you saw that ETFs are usually the simplest first step: broad diversification, low fees, and less need to analyse each company individually. (Source: Zorroh – How To Pick Your First ETF Or A Stock; Zorroh – ETF Investing for Beginners)

7 Powers is a simple way to raise your standards.

Before putting serious money into a single business, ask:

1. Which of the seven powers does this company genuinely have, if any?
2. Do the financials support that story, through margins, growth, retention, or returns on capital? (Source: Digital Garden – Notes from the 7 Powers Strategy)
3. Is that power getting stronger, weaker, or staying the same over time?

If you cannot answer those yet, one option is to keep using broad ETFs as your core and treat any single stock positions as learning experiments with small amounts. (Source: Zorroh – Investing 101; Capital Group – Time Not Timing)

Jargon Cheat Sheet (Beginner Friendly)

Use this section as a quick reference while you read or when you look at company reports.

Gross margin

• Conceptually: (Sales minus direct costs of goods or services) divided by Sales.
• Plain English: “How much is left from each dollar of sales after paying for materials and production?”
• Why it matters: higher, stable gross margins often signal brand strength or some kind of power such as pricing or product advantage. (Source: Investopedia – Gross Margin)

Operating margin

• Operating profit (after salaries, rent, marketing, and other operating expenses) divided by Sales.
• Plain English: “How much is left after running the business day to day, before interest and taxes?”

Unit economics

• The revenue and costs tied to one unit: one customer, one order, one subscription, or one store.
• Plain English: “Does each additional customer or order help profits, or does it quietly lose money per unit?”
• Good unit economics mean scaling up should help profits, not just grow top line revenue. (Source: Brice Prigent – Unit Economics and 7 Powers)

Pricing power

• The ability to raise prices without losing many customers.
• Shows up as strong margins and steady demand even after price increases.

Moat

• A metaphor for a company’s defences: what protects its profits from competition.
• 7 Powers is essentially a structured way of asking: “What is this company’s moat and how strong is it?” (Source: Investing for Beginners – Moats and Forces)

Network effects / network economies

• When a product or service becomes more valuable as more people use it (social networks, marketplaces, payment networks).
• Often leads to “winner takes most” dynamics. (Source: NFX – Network Effects Manual)

Switching costs

• The pain (time, money, risk, hassle) a customer experiences when changing to a competitor.
• High switching costs make customers more likely to stay, even if a rival appears.

Scale economies / economies of scale

• When getting bigger lowers the average cost per unit, because fixed costs are spread across more output.
• Strong scale economies can allow a leader to keep prices low and still earn good profits. (Source: Tyas Tunggal – 7 Powers)

If you stick to a core of diversified ETFs, and use 7 Powers plus this cheat sheet to check whether a company has any real edge, you will already be thinking more like a long term business owner than a short term trader. (Source: Zorroh – Investing 101; Capital Group – Time Not Timing)