Businesses must be efficient in everything they do to keep a competitive advantage.
Production efficiency is easy to measure through waste, input costs and employee headcount. Sales efficiency is harder to measure, but just as important for many companies.
As children and teens head back to school this week, here are four companies held in the HL Select portfolio who secure their sales from customers early on in their lives.
What we look for in companies
One of the criteria we look at for the HL Select fund range is a company’s route to market.
How do they find their customers and how do they control the cost of doing so? If they don’t control those costs, then sales won’t generate the desired returns.
Meanwhile, companies with efficient sales channels can enjoy stronger returns than their rivals. This gives them an edge in the eternal battle to stay ahead.
For that reason, we like companies that can create recurring sales for relatively modest costs.
We also like businesses with high gross margins, in other words companies that can charge well above the marginal cost of production for what they sell.
Software fits this bill nicely and there are a few software businesses that we hold in the HL Select fund range. We think they’ve been especially effective in creating strong recurring sales bases, by positioning themselves in the learning stages of their customers’ lives.
The information provided is the manager’s view of the HL Select funds and not individual stock recommendations.
This article isn’t personal advice, so if you’re not sure an investment is right for you, ask for financial advice. All investments can rise and fall in value, so you could get back less than you invest.
Microsoft Office
Who, under the age of about 45, didn’t pay peanuts (if anything at all) for a student licence to use Microsoft Office?
Microsoft won’t have lost money on those, because the cost of making a CD-ROM or providing a licence code is not high. But everyone graduates in their chosen subject – and MS Office.
It’s hard to imagine a future where we won’t use Outlook, Word, Excel and PowerPoint as a universal ecosystem within commerce.
Autodesk
Autodesk is a US software enterprise which owns the dominant suite of software products used by architects, engineers and building consultants in their trades.
Autodesk also makes their products freely available to students of these professions. Getting that universal acceptance of the product means that when students enter the workplace, they’re capable of rapid productivity, if their employers use the Autodesk suite.
Complex software creates sticky customers too, for the effort to retrain onto rival offerings is more trouble than many busy professionals will stomach.
Adobe
We see a similar strategy with Adobe, who dominate the world of creative software.
They encourage students, schools and colleges to adopt their software suite through hefty discounts. This means that when the next generation enters the workforce, they do so already familiar with key parts of the Adobe range.
For many students, Adobe’s Firefly could be one of their first interactions with commercial AI tools.
RELX
RELX is one of the world’s leading academic publishers and their Elsevier division manages some of the most respected journals, in fields from science to medicine and nature.
The commercial model of academia changes steadily, but the attraction to academics of seeing their work published in leading peer-reviewed journals is undimmed.
As undergraduates and post-grads, the students need the journals to research their studies. As academics they return to the same journals to see their work validated and their careers develop.
It’s a symbiotic relationship between publisher and the education system which has delivered what we believe is one of the most durable growth franchises in the market.
All these companies have been smart in the way they use their positioning in the learning stages of their customers’ and end users’ lives.
They have other products and other routes to market, too. But all have built what we think are high-quality businesses. They’ve embedded themselves deeply into the day-to-day processes of their young customers, have created sticky, cash generative routes to market that are likely to repeat far into the future.
We think businesses that generate repeatable sales are often better placed than companies dependent on finding a whole new crop of clients every time they throw the shutters open.
It means the cost of the recurring service is likely to be a very small part of an enterprise’s total cost base, but the value it creates for the user can be substantial.
Microsoft Corporation, Autodesk Inc and Adobe Inc are all currently held in the HL Select Global Growth fund.
RELX plc is held in the HL Select UK Growth and HL Select UK Income funds.
Steve Clayton is Head of Equity Funds at HL and leads the HL Select fund team.
HL Select is a group of three funds focused on spotting shares with long-term growth potential.
The HL Select funds are run by our sister company Hargreaves Lansdown Fund Managers Ltd.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.