Warren Buffett Reminds Us of the Critical Importance of Treating Customers Well
While we don't often think of the customers of the various companies Berkshire Hathaway owns, Warren Buffett wants us to know their satisfaction is more important than just about everything else.
In the 2005 letter to Berkshire Hathaway shareholders, Buffett penned the preceding quote, explaining how he thinks about and invests in great businesses.
Beyond the financial statements
Often in investing we can be drawn into considering only what the balance sheet or income statement will tell us. Yet Buffett continually speaks to the reality that businesses of all shapes and sizes are successful when they've established a "moat" that protects them.
One of the ways to do that is through low costs. Another is through a powerful brand. Yet in each of those approaches, Buffett understands that the satisfaction of customers who pay for goods and services is absolutely critical.
The powerful thought
Buffett went on to say:
When our long-term competitive position improves as a result of these almost unnoticeable actions, we describe the phenomenon as "widening the moat." And doing that is essential if we are to have the kind of business we want a decade or two from now. We always, of course, hope to earn more money in the short term. But when short term and long term conflict, widening the moat must take precedence.
Though it isn't a Berkshire investment, consider Amazon.com , which made less in the three years from 2011 to 2013 combined -- $866 million -- than it did in either 2009 or 2010:
Yet over those five years, Amazon watched its stock skyrocket by almost 650%, from $54 a share to nearly $400. Why? It undoubtedly couldn't have been the bottom line.
Instead, there was the undeniable reality it had done an incredible job at growing its revenue to stand three times higher in 2013 than it did in 2009:
So how did it grow its top line so remarkably? Of course its low prices played a role. But there is also the undeniable -- and often underreported -- reality that Amazon is one of the best companies at satisfying its customers.
Amazon CEO Jeff Bezos once said: "We're not competitor obsessed; we're customer obsessed. We start with what the customer needs and we work backwards."
Consider for a moment that Amazon topped the American Customer Satisfaction Index for Internet retail with a score of 88 in 2013, an improvement over its own leading mark of 85 in 2012. Meanwhile, the Internet retail industry as a whole saw its satisfaction rating fall by 5% to 78 last year.
The 2014 Temkin Customer Service rating for Amazon was even more impressive, as its score of 79% placed Amazon second of 232 companies in the United States. In addition, Amazon was head and shoulders above the 59% posted by the broader retail industry, and its showing was a remarkable improvement over the 67% it posted in 2013.
It should come as no surprise that Buffett said last fall of Amazon's chief: "It's a tremendous accomplishment what Jeff Bezos has done -- I tip my hat to him. He's a great businessman and a good guy, too."
All too often investors think short-term quarterly improvements in income are the only thing that matters. However, as I've noted, Buffett suggests that "when short-term and long-term conflict, widening the moat must take precedence." Bezos and so many others who have been successful have clung to this reality, and they've widened their moats by offering great service to customers.
Warren Buffett wants us to see that while satisfying customers and widening a moat may not impress anyone on Wall Street over the short term, in the long run, it truly makes all the difference in the world.
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The article Warren Buffett Reminds Us of the Critical Importance of Treating Customers Well originally appeared on Fool.com.Patrick Morris owns shares of Amazon.com and Berkshire Hathaway. The Motley Fool recommends and owns shares of Amazon.com and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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