Among the many investment books I have read, only a few have inspired me enough for me to write about them in some detail. One of them would be The Investment Checklist by Michael Shearn.
This is part 3 of Shearn’s checklist, which continues with the remaining questions relating to the customer perspective of “Understanding the Business” (you can take a look at the previous part 2 here).
5. What are the signs that the business is customer-oriented?
A business which is set up to take care of customers’ needs and to provide great customer service is one which will see repeat business.
Look out for companies which emphasise customers’ welfare and those with clear customer orientation. Remember that customers are the ones who bring in revenue and cash for the business. Therefore, if the investor can find clear signs to show that the business is adored by customers, it most likely will have a powerful moat compared to its competitors.
6. What pain does the business alleviate for the customer?
Businesses should be set up to solve problems for customers or to make their lives easier.
Many successful companies sprung up from ideas which entrepreneurs had when they encountered difficulties or obstacles, which prompted them to think about how to solve the problem or correct the situation. The more pain the business alleviates for the customer, the more business it will attract. Along the same lines, the more convenient and seamless the customer experience is, the more this will endear the customer to the business.
7. To what degree is the customer dependent on the products or services from the business?
Investors need to ask themselves if customers are heavily reliant on the business for its products and services, to the extent that the business can charge higher prices and still maintain constant sales volume.
Another factor to look at is whether competitors are offering the same type of product or service and the switching costs for the customer. The Five-Forces Model which I wrote about is useful in this respect too. In a nutshell, if the customer is very dependent on a company’s products, this will make the customer “sticky”, and it is harder to lose such customers even when bad times roll along.
8. If the business disappeared tomorrow, what impact would this have on the customer base?
This may seem a rather drastic question, but it is a good thought exercise to perform to assess how the customers will be impacted by the overnight disappearance of the business.
Take a commodity firm for example – if it disappeared overnight, the customers would just switch to another commodity supplier without blinking. It would be business as usual without much disruption.
However, if the business was an important cog in the supply chain (for example, it may be the manufacturer of work-in-progress components which are sold off for final assembly), then customers would scramble to look for another supplier with the same production capacity, capability and know-how. These points also illustrate the importance of the company with respect to its customers.
In the next section, I will discuss the questions which evaluate the strengths and weaknesses of the business and industry.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.