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posted on 28 May 2017

The Value Of Loyal Customers

from the Philadelphia Fed

-- this post authored by Leena Rudanko

Is there a rational reason that stock prices in some industries greatly exceed book values? The answer may lie in the idea that customers are capital.

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. 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 [graph above].

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."

[click on image below to continue reading]

Source economic-insights/2017/q2/ eiQ22017_loyalCustomers.pdf?la=en

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