A common pattern with tech businesses is a shift towards renk-seeking behaviour once volume growth becomes more difficult to grow. Rent-seeking behaviour, is effectively just a term for raising the price without offering any extra value in return.
On one hand, this is a strong signal of a moat. After all, if customers have to take the price rises, it means they likely have no alternative. On the other hand, it is form of laziness. It is a way to grow earnings in the short-term without creating value, and value creation is at the heart of a businesses long-term prospects. We want to own wonderful businesses with long economic runways and products or services beloved by their customers.
Businesses that conduct in rent-seeking behaviours are the same that are most quickly disrupted when an alternative does eventually come along. If customers, tenants, are willing to jump at the first opportunity and are desperate for an alternative, its a good sign that the business is not a long term compounder.
Connections
Management Must Show That They Understand What Creates Value
Link Explanation: At the end of the day, management is responsible for the decision to raise prices, to invest in innovation, and for everything else that comes with business performance. Rent-seeking is clearly a financial indicator, but it also tells you a lot about how management thinks. Do they respect their customer? Do they obsess over value creation? Or are they extractive and trying to simply pull as much money as they can without providing anything in return? Growth coming from price rises vs. volume growth is a great indicator for this.