No business can survive, let alone profit, without customers. For most businesses, it takes money and creative effort to attract and retain customers. Businesses therefore have clear incentives to spend resources on these activities. Reflecting how important it is to secure a steady stream of customers, a recent study finds that U.S. businesses spend as much as 8 percent of their revenue on marketing the value of their products, services, or brand for the purpose of generating sales.1 Total U.S. marketing spending has been estimated to amount to 8 percent of the gross domestic product—a substantial share of the nation’s output—while advertising, which makes up a big part of marketing, amounts to 2 to 3 percent of GDP just on its own (Figure 1).2
Customers are obviously essential for businesses as a source of current revenue, but is there more to it than that? Once customer loyalty comes into the picture, customers become particularly valuable to those businesses that need to spend resources to attract them. A company’s base of existing and repeat customers becomes an asset for the firm, while the money it spends on marketing and selling activities aimed at attracting additional customers becomes a form of investment in the customer base of the firm—its “customer capital.”
The notion that loyal customers are capital for firms has intrigued economists in part because it may explain why young firms grow so slowly. The gradual pace at which new businesses accumulate customers has been shown to be a key factor limiting firm growth.3 New businesses start out small relative to existing ones, and this gap closes only slowly over time. The slow growth does not appear to be due to lower productivity or higher prices at new businesses, however. If anything, new businesses appear to be more productive and set lower prices, suggesting their growth is constrained by insufficient demand amid the gradual growth of their customer base.
This article appeared in the Second Quarter 2017 edition of Economic Insights. Download and read the full issue.
See the CMO Survey.
Costas Arkolakis’ article includes a measure of marketing as a share of GDP.
See the two articles by Lucia Foster, John Haltiwanger, and Chad Syverson.View the Full Article