Companies that cash in on returning customers
Some stocks keep making money because customers have to keep coming back to buy some part of their offering – companies that manufacture razors are prime examples of this because razor blades need to be replaced constantly. Are there any locally listed ex
iheard a great phrase the other day that I did not understand at first: the “returning razor” business model. The concept is a business that requires customers to come back to restock after having bought your product initially. With razors, they sell you a fancy product with a few blades for cheap and then they charge a fortune for new blades we need to buy every month. (Here’s a tip on how to save money on razors: I’ve been using a safety razor in the style our grandfathers used for the past few years. It does the job as well as any fancy razor (if not better) and a good blade costs around R1, which, if dried after every use, easily lasts me more than a month. I spend less than R10 a year on blades.)
This is a great business model if you can keep the customers coming back.
The real beauty here specifically is that the majority of men shave on most days and once you’re using a certain razor, you are likely to keep using that specific brand’s offering. Further, producing and distributing the blades for purchase is cheap and easy. So these companies are guaranteed regular predictable sales at fantastic margins – the “returning razor” model. This is a great sticky business with impressive profits.
South African examples of the ‘returning razor’
Locally we have no listed razor businesses, but perhaps we have some variants of the model that we can invest in.
The mobile companies do lock you into their service with contracts that we sign because we want the “free” phone. But we do not need to consume data, or at least can manage how much we use, and free WiFi eats into the companies’ model. We also have the option of exiting the contract at the end of the period and changing providers.
Blue Label with its data and electricity point of sales terminals seems a decent fit – these terminals cost the company almost nothing and it has a fairly large captured market. But here the margins are very slim and, as already mentioned, the market is captured. Further, the business includes Cell C and now also recently handset sales, which blurs the lines.
Another sector I thought of was new vehicle sales, but the customer is only returning for the annual services that are often covered by a service plan. The other returning customer is buying parts if something breaks, a rare event and not nearly as profitable as the returning razor business.
Car-tracking companies are maybe a lot closer to the razor business. They install a device and then charge a monthly fee to track the vehicle. This is in a way like any other monthly fee such as medical aid, insurance and data as above. However, the cost per month for the consumer is small enough to hardly be noticed and the cost for the company to run each installed unit is zero. Once you have sold the tracking device it’s pretty much all profit margin unless a vehicle needs to be tracked.
Banks are another with their monthly account fees but the complexity of their businesses means this largely gets lost in interest, bad debts and the like.
Another is the computer IP companies such as ISA, EOH and AdaptIT. The former sells computer security software while the latter two offer several software services that lock clients in as changing the software or provider is expensive and risky. But again, these services are not managed at zero costs as the company needs engineers and other experts.
A gym membership is another great possibility but we have no listed gyms since LeisureNet, which ran Health and Racquet Club, and that went bust in 2000.
Insurance seems to fit but while the insurer does collect nice premiums every month, companies within this space face the real risk of having to make payouts. Events such as the recent fires and storms in the Western Cape will have a big impact on their bottom lines.
I may be missing some JSE-listed companies or sectors that meet the returning razor business model. Let me know if I am. But in the meantime, maybe it is time to revisit the two car-tracking service providers on the JSE – MiX Telematics and Car Track – and to have another
look at the three IT stocks. ■
Car-tracking companies are maybe a lot closer to the razor business. They install a device and then charge a monthly fee to track the vehicle.