Every long-term investor dreams about investing in companies with durable competitive advantages. However, with over 15,000 companies traded publicly, it can be difficult to separate the wheat from the chaff.
In the article, A Formula You Can Profit From, I explain the linkage between pricing power and profit. Having unique selling point is crucial, but sustaining pricing power is complex, and few companies have been able to do it. Fortunately, there is an indicator more accurate than margins and sales to find these companies. What is it? Brand loyalty.
Brandishing loyalty
Every day we purchase certain products despite the availability of cheaper, and better alternatives. Economics tells us to buy the product with the highest marginal utility, but consumers don’t always pursue such a complicated analysis. They stick to brands. A brand represents an assurance of quality, and provides us with a similar experience time and again.
With brand loyalty comes pricing power. With pricing power comes profits. They only question left is, how you do find brand loyalty? The answer is simple: Look around you.
Your friends and family routinely use products they love and would not willingly sacrifice. If you’re having trouble thinking of some, here are four companies whose brand loyalty has led them to a durable competitive advantage:
Apple Inc. (NASDAQ:AAPL)
It’s difficult to have a conversation about brand loyalty without mentioning Apple Inc. (NASDAQ:AAPL). Its stylish and easy to use products have captured the hearts, and wallets, of millions of consumers. As mentioned previously, 91% of existing Apple Inc. (NASDAQ:AAPL) customers plan to stay with the company when the time comes to upgrade their existing device. High brand loyalty in a competitive marketplace puts Apple Inc. (NASDAQ:AAPL) one step ahead of competitors.
The best part about Apple Inc. (NASDAQ:AAPL)’s brand loyalty is that it’s infectious. The word-of-mouth of Apple’s “fan boys” have convinced consumers that their products are the best. A recent survey suggested that twice as many people plan to make their next smartphone purchase an iPhone rather than an Android device. If Apple Inc. (NASDAQ:AAPL) is able to capture these new users, current trends predict that they will capture their loyalty and the pricing power and revenue that comes with it.
Google Inc (NASDAQ:GOOG)
While Google Inc (NASDAQ:GOOG) has yet to master brand loyalty among Android users, it commands brand loyalty among online searchers. Bing? Yahoo? For most of us, we would have to check our history to figure out the last time we used an alternate search engine. Google Inc (NASDAQ:GOOG) owns about 81% of the desktop search engine market.
In Google Inc (NASDAQ:GOOG)’s core business, more traffic means more money. Advertisers pay Google Inc (NASDAQ:GOOG) in exchange for placement of ads on one of Google’s many sites. This is where Google gains its pricing power. As long as consumers turn to Google for information, marketers will be willing to pay for targeted ads.
