Not a day goes by when we're not bombarded by advertisements to save money on auto insurance. Geico, Allstate, Progressive, 21st Century... I'm not sure how they can all be the cheapest, but that's entirely another story.
The point is, these messages don't really hit home with me. I'm fond of the Geico cavemen, but they don't compel me to switch insurance carriers.
First, there's always the concern about whether the price comparisons are truly apples-to-apples when it comes to specific features and benefits. Even if one of these companies could save me a few dollars initially, what's to stop them from jacking up those premiums a few months down the line?
Plus, I get multi-line discounts for having auto, homeowners and other policies with the same agency -- and switching might jeopardize those favorable rates I'm paying for other products. Finally, dealing with a new insurance agent can be a wild card, who knows how responsive they will be with claims and other customer service issues?
Don't tell State Farm, but they could raise my premiums and I probably still wouldn't switch. The point is: Customers on the books tend to stay on the books. This can translate into big rewards for shareholders.
Very few companies escaped last year's downturn unscathed. But for a handful, it was business as usual.
Take CSG Systems (Nasdaq: CSGS), for example, which handles billing and other services for cable and satellite TV providers like Comcast (Nasdaq: CMCSA) and Dish Network (Nasdaq: DISH). The company gets paid to mail out monthly statements to roughly half the households in the United States, and it processes about $3 billion in transactions every month.
Setting up the firm's complex billing infrastructure can cost millions and take months to complete. Once a customer like Time Warner (NYSE: TWX) has made that type of commitment, it is usually very reluctant to take its business elsewhere. Most sign long-term multi-year contracts. As a result, CSG Systems has money coming in the door rain or shine.
Despite a sharp plunge in consumer and business spending, the company posted a healthy +13% increase in revenue last year. Those improvements help explain why CSG Systems swam when the rest of the market sank like a rock. The shares delivered +19% in 2008, while the S&P 500 nosedived -38%.
The stock is a prime example of how a sticky customer base can keep a company's stockholders happy in any environment.
"Switching Costs" Are a Headache
We all know that neighborhood gas stations have basically zero pricing power. It takes almost no effort to pull in next door to save a few cents a gallon, so pricing is cut-throat and margins are razor thin.
At the other end, there are well-placed firms like CSG Systems that can milk their customers. Clients aren't going to throw away millions in upfront installation expenses and then spend time and money retraining its employees on a new system just to save a few bucks.
As a result, the business tends to be highly stable.
Banks and asset management companies often benefit in much of the same way. It's not that we couldn't find a cheaper checking account or better performing mutual fund somewhere else, but the headache of signing papers, transferring assets, filling out new direct deposit forms, etc. is enough to dissuade most of us from jumping ship.
Simply put, these "switching costs" usually outweigh any benefit associated with moving to a competitor.
Think of Fiserv (Nasdaq: FISV). The company provides the software that process millions of ATM withdrawals, checking deposits and other transactions for banks and credit unions. It's not a glamorous business, but can you imagine the possible disruption of handing this critical behind-the-scenes task to a rival that might not be as reliable.
Fiserv rarely loses customers -- the company boasts a near-perfect retention rate of 99%. That's a big reason why its shares have delivered an eye-popping gain in excess of +4,000% during the past two decades.
Companies with a Committed Customer Base
There's no easy way to screen for a sticky customer base. Superior pricing power often shows up in lofty margins and robust returns on equity relative to industry peers. Along with CSG Systems and Fiserv, the companies in the table below are all worthy of consideration.
|Company (Ticker)||Operating Margin||Return on Equity|
|FICO (Nasdaq: FICO)||+21%||+14%|
|Autodesk (Nasdaq: ADSK)||+18%||+29%|
|Microsoft (Nasdaq: MSFT)||+36%||+33%|
|Intuit (Nasdaq: INTU)||+24%||+22%|
|Stericycle (Nasdaq: SRCL)||+25%||+18%|
|SAP (NYSE: SAP)||+26%||+30%|
|FactSet Research (NYSE: FDS)||+33%||+29%|
|Dolby Labs (NYSE: DLB)||+35%||+20%|