Complements

Complements (also known as complementary goods) are pairs of products or services that consumers tend to use together. The magic of this relationship is that a change in the price of one good directly impacts the demand for the other. Specifically, when the price of one item falls, people buy more of it, and as a result, the demand for its complementary partner rises. The classic example is hot dogs and hot dog buns; if hot dogs go on sale, supermarkets can expect to sell more buns, even if their price hasn't changed. This inverse relationship is a fundamental concept in economics, signaling that the value of one product is enhanced by the availability and use of the other. For investors, spotting these powerful duos can reveal hidden strengths and robust business models.

The philosophy of value investing is built on finding wonderful companies at fair prices, and a “wonderful company” almost always has a durable competitive advantage, or what Warren Buffett calls an economic moat. Complements are a fantastic way to build such a moat. When a company creates an ecosystem of products that work together, it can lock customers in, creating high switching costs. Imagine you own a Sony PlayStation and have bought a dozen games for it. Even if Microsoft launches a slightly better Xbox, the cost of ditching your game library and starting from scratch is a powerful deterrent. This lock-in effect gives the company predictable, recurring revenue and strengthens its pricing power. A business that effectively uses complements can create a loyal customer base that is less sensitive to price competition, leading to higher and more stable profit margins over the long term.

This is the quintessential business strategy built on complements, and once you see it, you'll spot it everywhere. The “razor and blades” model involves selling a core, durable product (the “razor”) at a very low price—sometimes even at a loss—to hook a customer. The real profit is then made on the repeated sale of a high-margin, consumable complementary good (the “blades”) that the customer needs to keep using the core product. Classic examples are legendary for their effectiveness:

• Gillette: Sells razor handles for a low price but makes a fortune on proprietary replacement blade cartridges.
• Hewlett-Packard: Sells printers cheaply but charges a premium for its branded ink cartridges.
• Keurig: Sells coffee machines at a reasonable price to drive the continuous purchase of its K-Cup coffee pods.

For an investor, this model is a sign of a potentially brilliant business. It creates a steady, predictable stream of sales that isn't dependent on constantly finding new customers for a big-ticket item.

Beyond the classic razor-and-blades, look for broader product ecosystems. The undisputed modern champion is Apple Inc.. An iPhone is useful on its own, but its value explodes when paired with complementary products and services:

• Hardware: AirPods, Apple Watch, MacBooks.
• Software & Services: The App Store, iCloud, Apple Music.

Each piece of the puzzle makes the others more valuable and harder to leave. This creates incredibly powerful network effects and a formidable economic moat. When analyzing a company, always ask:

• `* What else do customers need to use this product?`
• `* Does the company I'm analyzing control the supply or price of these complementary goods?`
• `* Is this relationship creating a loyal, locked-in customer base?`

While powerful, a business model built on complements isn't foolproof. The strategy carries its own set of risks that investors must consider. The biggest threat is disruption. A competitor might design a universal “blade” that fits every “razor,” breaking the proprietary link. For example, third-party companies that sell cheaper ink cartridges are a constant thorn in the side of printer manufacturers. Similarly, if a company depends on a complement it doesn't own, it can be vulnerable. Many small businesses built their success on Facebook pages, only to see their reach and revenue plummet when Facebook changed its algorithm. Therefore, when you spot a business thriving on complements, your next step is to assess the durability of that relationship. Who truly holds the power? The answer will tell you a lot about the company's long-term prospects.