We've all done it before. You see two petrol stations close to each other, with pretty much the same price per litre. One morning, one of the owners gets up earlier than the other, and puts his display price down by 2-4 cents before the morning rush.
Drivers on their way to work spot the difference since they have been trained by recent high prices to look it, and they turn off to the cheaper station to fill up. Petrol is a commodity, and it doesn't matter if you buy petrol A or petrol B.
On the other hand, companies with recognizable brand names or specialised products often become synonymous with the product or service. If you want fried chicken, you probably think of KFC. Brand names also provide pricing power — Gucci makes leather bags, as do many other companies, but the name alone raises the price.
Take Realestate.com.au, owned by REA Group (ASX: REA). It competes with domain.com.au, owned by Fairfax Media (ASX: FXJ). Domain.com.au has a strong following in NSW, especially Sydney, but realestate.com.au has maneuvered itself into the top spot for the whole country, and is expanding internationally, too.
Anyone can set up a website to advertise properties, and there are many that do, but realestate.com.au has become so synonymous with real estate advertising that it can charge a premium for listing properties from real estate agencies. Agents want maximum exposure, so they pay it. Price is not the sole factor in deciding where they get the service, so this doesn't become a petrol price war.
In the past 10 years, Fairfax Media's share price has gone from $3.35 to around $0.50 currently. REA Group was $0.62 in October 2003, and now stands around $41.25. During the same time the S&P ASX 100 Index (ASX: XTO) went up 95% from 2271 to 4413.
Foolish takeaway
Competitive advantage is a big factor in a company's ability to grow. Is it in a price-competitive industry where discounters win, or can it attract a premium because of its brand or quality?
If the company has to spend great sums of money just to stay afloat, when it inevitably slows down even a tick, competitors will overtake it. The product or service may good, but it isn't durable. All that money for just keeping up means that shareholder return will be less than what it could be. Use that as a gauge to measure your stock picks.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.
