Give away the razor; make money on the razor blades. It’s a cherished business strategy popularized by companies such as Gillette.
But how about Give away the computer; make money on computer covers? Heard that one yet?
Well, it’s worked just fine at Wal-Mart (WMT) where a Compaq Presario model sells for $298. And now it’s spreading to Best BUY (BBY) and Staples (SPLS). Best Buy picked up two percentage points of market share from February through April thanks to aggressive sales in an expanded electronics section focusing on laptops and netbooks. Staples has increased its selection of computers in those two market segments by 50%.
When I was a kid growing up in New Jersey, I swear that a local retailer ran adds saying “We lose money on every sale and make it up on volume.” Now that can’t possibly work, can it? Aren’t computer retailers cutting their own margins–and throats?
No way.
In fact, these companies are actually late comers to a major economic trend.
Anybody who has bought a printer recently knows that they’re giving the hardware away because the big money is in ink cartridges. The airlines have demonstrated that you can make bigger profits on baggage and other add-on fees than by flying people around the globe.
It’s the extras that count.
Sell a netbook or laptop buyer an external hard drive. Get them to plunk down for a carrying case. How about DVD drive for that netbook? These add-ons, according to Bloomberg, are three times as profitable as the computers.
And customers spend almost as much on these more profitable add-ons as they do for the computer. In 2008 customers bought 89 cents of accessories for every $1 they spent on personal computers, research company IDC told Bloomberg.
My recent experience is typical. I bought a netbook for $199. Then added on a case for $21.95. (My Best BUY didn’t sell a case for less than $14.95.) Â And an external DVD drive for $79.95.Â
I’m not sure I’m done either. So far I’ve avoided purchasing any cables or hubs. But those noise cancelling headphones near the checkout looked like what I’ve always wanted for long plane trips with my kids.
And, of course, every time through that check out line somebody always asks me about buying an extended service contract.
 Makes you wonder, as an investor, if you shouldn’t be buying shares in companies that make the equivalent of razor blades and not in the razor manufacturers themselves.
So far, I haven’t been able to come up with any investment candidates. Targus Group International, the big maker of the cases on sale at my Best BUY is privately held. So is the big maker of cables and hubs for the retail consumer Bellkin International
Anybody got any other ideas? Post ’em here. Please.
Thanks for the heads-up, Jim. You’re in my Google reader feed so I will definitely be looking at that over my morning coffee.
tpdorsey, see my take on Apple before the open tomorrow. Should go up around 8:30 a.m. on Tuesday.
terryw:
You’re getting a lot of analysts downgrading stocks on valuation, which is what I think the call on TC was. They’re just trying to be responsible and flag stocks that are way ahead of themselves. TC at $15.50 is discounting a lot of the global recovery before it happens. The stock jumped when JP Morgan Chase upped it to overweight and called it “cheap.” At this stage in the rally that might be a legitimate difference of opinion, but I worry that we’re starting to see analysts chase the market momentum. Hard not to when everything you follow comes up expensive by your usual standards and then keeps going up.
Apple is a sort of counter-example that meets your criteria. They sell the whole package, from hardware to apps, and they get a piece of every transaction. They’ll have a netbook-type device later this year.
Dell would be my second pick. I think they have a well thought-out online buying experience and do a good job of cross-selling accessories.
Looking at the accessories on my desk I see a variety of SanDisk memory products, Western Digital Passport (and drives in my computers), a Canon scanner, Samsung and Sony monitors, and an Epson 4-in-1 WiFi printer (which replaced a Canon inkjet).
Otherwise it’s such a grab bag of smallish brands selling items that go out of fashion or become obsolete.
So I’m sticking with Apple and Dell as my first choices.
Psychologically we are not prepared to the computer rising prices. So, once the recession is over, computer manufacturers have to continue using the same price level or even go further down.
Netbooks are already sold for free as a part of the package. Computer manufacturers will be paid by internet providers. It does make sense.
Hi Jim, On an unrelated note, whats your take on CIBC downgrading TC and upgrading GMO? (TC is up 7% this morning and making me very happy)
In today’s personal computing world, getting online is just as essential as getting a computer. It is after all what powers the netbook phenomenon. Net Gear (NTGR) manufactures a plethora of networking accessories for home and business uses. Without a wireless router, a laptop by it self is pretty useless.