Customer Capital Is Increasingly Important

Your current research focuses on subscription businesses and the importance of customer capital. What is that, and why is it important for the economy?

We often think of firm value as coming from employees or physical capital such as machines and equipment. But the customer base that a company builds can be quite valuable. We call that customer capital.

To accountants, winning customers is a variable input cost. But in my research with Chicago Booth PhD students Bianca He and Lauren Mostrom, we think about the customer relationship as a dynamic investment that generates long-term profits.

From that perspective, some companies are being undervalued. They appear to have low operating income because they’re spending so much on sales and marketing, but those investments could yield huge amounts of revenue in the future.

The US economy has moved more toward long-term models for which customer capital is critical. Many businesses now have subscriptions with other businesses—for software, for example. Subscription-based companies are the fastest-growing part of the economy, which means that intangible capital is playing an increasingly large economic role. 

In our research, we’re able to demonstrate that when a public company makes an acquisition, customer relationships are listed as a source of value, and companies are thinking about how to borrow directly against that. 

The conventional wisdom in entrepreneurship is that revenue is more important than customers. Does your research suggest that customers are more important in the long run?

Yes. That’s why companies offer you a discount up front, knowing that once they have you hooked into that relationship, they’ll be able to jack up prices in the future. The market understands that. If you look at subscription-based companies, their enterprise value is high relative to their physical capital. 

Advertising, sales, and marketing are all part of building brand value, which is another big part of customer capital. Brand is why consumers are willing to buy a product at higher-than-marginal cost, perhaps because the brand makes them feel good, or because they think that it represents quality.

We find that some industries, such as mining and upstream manufacturing, spend almost nothing on sales and marketing—whereas anything in high tech, such as medical equipment or computer manufacturing, spends huge amounts on customer acquisition. That includes meeting customers, explaining the product, and making sure it works for them. We can really see the guts of why this approach is powerful and why it creates valuable capital.

Amir Sufi is the Bruce Lindsay Distinguished Service Professor of Economics and Public Policy at Chicago Booth.