Friday, July 29, 2005


The three companies I bought for my IRA share a common tactic—selling at low margin in order to win high-margin sales later on. Select Comfort sold a bunch of discounted beds to Radisson this year. In exchange, Radisson is using the Sleep Number bed to promote its hotels on TV and thousands of its guests will have a chance to try it out. Hopefully this will translate into sales at high margin Select Comfort stores or direct sales as people learn more about the product.

Canon (and other printer manufacturers) sell printers at very low margins in order to gain customers. They make much higher profits by selling "consumables" (paper and ink). While it is possible to buy generic brand consumables, they don't tend to produce the same quality as the name brand and don't really save all that much.

Oracle is quite willing to offer deep discounts on new licenses. (Even as low as free if the rumors are true.) But that's fine, because customers tend to use Oracle's software for many years and pay a steady stream of revenue to continue licensing the software and get support. Essentially the continuing revenue more than makes up for discounts at the front-end. Even better, most applications purchasers will also by Oracle applications servers and databases at a standard price.

In each case, it's best to think of the discounts as an investment rather then a cost. Like grocery stores advertising great deals on strawberries and steak in order to draw customers to the store to buy milk and eggs, these companies discount in order to bring in higher margin business. Ultimately the hope is to use discounts to increase earnings over time.

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