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14 Things to Check Before You Buy a Stock: Part 3

Making a List on Notebook
Making a List on Notebook

We are now at part 3 of a long list of items to check on before you decide to buy a stock.

This time, we look at the customer perspective to better understand the business.

You can take a look at the previous parts 1 and 2 here and here.

So, let’s jump straight into the remaining questions.

11. What are the signs a business is customer oriented?

A business that is set up to take care of customers’ needs and provide great customer service will enjoy repeat business.

Look out for companies that emphasise customers’ welfare as well as those with a clear customer orientation.

Remember that customers are key to the survival of any business as they are the ones who bring in revenue and cash.

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.

12. What pain does the business alleviate for the customer?

Businesses should be set up to solve problems for customers or make their lives easier.

Many successful businesses sprung up from ideas that entrepreneurs had when they encountered difficulties or obstacles.

These challenges prompted them to think about how to solve the problem or correct the situation.

The more pain points the business alleviates for the customer, the more business it will naturally attract.

Along the same lines, a convenient customer experience will surely endear the customer to the business, helping it to generate strong customer loyalty.

13. To what degree is the customer dependent on the products or services from the business?

Investors need to ask themselves how reliant customers are on the business for its products and services.

If customers cannot find alternative suppliers, then the business can charge higher prices and still maintain constant (or even rising) 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.

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.

High switching costs will deter the customer from changing suppliers, even if the supplier may offer more attractive terms and better service.

14. 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 assess how customers will be impacted by the overnight disappearance of the business.

Take a commodity firm for example – if it disappeared overnight, the customers would simply switch to another commodity supplier without a pause.

It would be business as usual without much disruption.

However, if the business was an important cog in the supply chain (for example, the manufacturer of work-in-progress components that 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 to its customers.

The next part will look at questions that help evaluate the strengths and weaknesses of the business and the industry.

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Disclaimer: Royston Yang does not own any of the companies mentioned.

The post 14 Things to Check Before You Buy a Stock: Part 3 appeared first on The Smart Investor.