Customer Focused Investing

Lessons from a recent miss

The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself

- Peter Drucker

"Knowing the business" is a phrase we hear all the time when it comes to investing. But what does it really mean? There's the product, the industry, the management... but there's one crucial aspect that often gets overlooked: the customer.

Often overlooked is the deeper nature of the customer. A strong relationship with the business customers can do wonders for long term chances of survival and profitability for businesses. It can be something that creates and then leverages a moat; think brand quality like Disney or Nintendo.

Lessons Learned:

I learned this the hard way with a failed investment in Avricore Health. I was so enamored with their business model that I missed a critical detail: their customer's (Shoppers Drug Mart) incentives. Shoppers is a massive pharmacy chain in Canada. For a new service like Avricore's to take off there, it would need to be pushed by individual franchisees. But there was no incentive for them to do so. It took time away from busy pharmacists, and the customer had to pay out of pocket. There was no big marketing push, and nothing from Shoppers as a brand.

Understanding the customer's incentives and how they do business is crucial.

Compare this to a company like Constellation Software. Their VMS businesses have sticky relationships with customers who rely on their entrenched, niche software. It's a simple idea, but often underrated.

Key Takeaway:

Stock price declines are an expensive way to learn. Don't fall in love with a business model without understanding the deeper nature of the customer relationship. It could be the difference between a profitable investment and a costly mistake.