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

Finweek English Edition - - MARKETPLACE | INVEST DIY - Ed­i­to­rial@fin­week.co.za

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.

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