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?
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.) And an external DVD drive for $79.95.
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.