We come acrossnumerous businesses with different types of business models. All of them claim to be worthy of investment. How many of themare**“reallyworth investing in the long run”** is the question to be answered! The businesses really worthy of investment for sure have to have some kind of a **“durable competitive advantage” **to sustain over the long run and give decent return on investment.Thesebusinesses come in three basic business models.They have been mentioned in the order of priority, the reasoning(priority) is givenalongside.
1). They sell a Unique service- These businesses own apieceof customer’s mind and have pricing power.Theydon’thave to incur huge R&D cost and huge CAPEX to keep the business running and so have the best margins among the the various business models.Its margins are really healthy and relatively more sustainable.
Eg: CRISIL when a company thinks of rating or grading it thinks of CRISIL. It incurs very small portion of its revenue in training its employees,it basicallyacquirestalent(so, it saves on R&D cost),it doesn’t have to incur huge CAPEX to maintain factories as itdoesn’t have any.
2). They Sell a unique product- These businesses own apieceof customer’s mind and have pricing power. They sell a stable product and don’t have to incur huge R&D cost to upgrade the product. They use the samemachinery and hence incur CAPEX only when themachinery wears down completely. This model isinferiorto the first one as at some point of time it has to incur CAPEX and because it is selling a product it has to cope with the fluctuation in raw material prices, thesethreatensits margins and the margins are relatively less sustainable.
Eg: whenever we think of cool drink we think of Coca-Cola or Pepsi. These companies have been selling almost the same product for more than a 100 years now( no R&D cost). TheyincurCAPEX only when the machinery completely wears down(occasionally).
3). They are low cost buyer and seller- Here the margins are traded for volumes. Here the advantage is buying at the cheapest price and selling at lowest prices to induce customers to buy from you. This is the mostinferior one as maintaining lowest price is the main focus. Hence the margins here are not very healthy and not very sustainable. But still these are far better than businesses with mediocre economies.
Eg: when we think of finding the best deal we think of Wallmart. Owing to its size it hasenormous bargaining power with suppliers and sells at heavily discounted prices. It enhances its ROE through increased asset turnover.