This series continues from Part 1 where you can find the first six questions and is adapted from the book “The Investment Checklist” written by Michael Shearn.
The second segment of the comprehensive checklist includes questions on understanding the business from the customer’s perspective.
Remember that these questions serve to enhance an investor’s understanding of a business, but should also be used in conjunction with other frameworks for analysis.
There are eight questions relating to customers but I will focus on the first four in this article, with the next four appearing in a subsequent article.
7. Who is the core customer of the business?
When evaluating a business, it’s important to know the types of customers the business is serving.
Is this a B2C (Business to Customer) or a B2B (Business to Business) model?
B2C customers are generally fickle and less loyal than B2B, barring some exceptions.
It’s also useful to define the demographic of the customer if possible (for B2C) – age, race, gender and income levels are some examples.
For B2B customers, try to find out which section of the supply chain they serve and also the general profile of the customers.
Are these multinational corporations (MNCs) or a smattering of small and medium enterprises (SMEs)?
8. Is the customer base concentrated or diversified?
Next, try to ascertain if the industry is concentrated in a few large players or is fragmented.
If the customers are few and concentrated, they can exert more bargaining power against the company (i.e. their supplier).
As a result, the company will face a tougher time trying to raise prices.
If the customer base is dispersed and fragmented, the company would find it easier to raise prices or tweak its product mix as the customers have less bargaining power.
9. Is it easy or difficult to convince customers to buy the products or services?
Some products and services are niche and specialized and it may be tough to convince customers to buy them.
An example might be a high-end coffee machine which can brew wonderful coffee, but which comes at a very high price.
Most people would settle for a normal-priced coffee machine or just buy coffee from a nearby coffee joint.
Hence, it may take a lot of effort to convince customers to part with their money for this type of expensive product.
Investors should review the company’s suite of products and services to assess how easy or tough they are to sell.
If a product is too specialised and a customer leaves, it’s also tougher for the business to find a replacement for its lost revenue.
10. What is the customer retention rate for the business?
One of the most important aspects of serving customers is ensuring that they are satisfied so that they come back for more!
Happy customers not only make repeat purchases, but they also convince other people to become customers through positive word of mouth.
This culminates in a virtuous cycle that can help the company significantly grow its customer base.
It is also much cheaper for a business to retain customers than to acquire new ones.
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Disclaimer: Royston Yang does not own any of the companies mentioned.