Customers are key to surviving recessions

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Tariffs. Recessions. Pandemics. War. These kinds of black swan events can have significant ripple effects across an economy. And the impacts can extend far into the future, long after the peak of the crisis.

For businesses, the impacts of such events are often measured in terms of financial or human capital. How much revenue did we lose? Will we have to cut jobs? But now, Paul Beaumont, Assistant Professor of Finance at McGill University, calls our attention to customer capital – a much less understood form of value.

Customer capital describes the strength of a firm’s relationships with its customers, such as their size, loyalty, and trust in the brand.

“It’s a type of capital that all firms have,” he said. “Paradoxically, it’s a form of capital that has been less explored by the academic literature.”

In a recent study, Beaumont discovered that customer capital can depreciate significantly during economic downturns. They lose customers and struggle to win them back – adding to an already difficult post-recession recovery.

These findings come as organizations grapple with continued global economic uncertainty and heightened geopolitical tensions. Canada and the United States are in a trade war, the Russia-Ukraine war is straining global food and oil supplies, and some investors are predicting an AI collapse that could have severe economic ramifications.

In such a context, organizations will be looking for ways to insulate themselves from economic downturns. Or, at the very least, recover more quickly after the fact.

Protecting customer capital could be a way to do that. But it won’t be easy. Firms easily lose customers during recessions, and rebuilding those relationships can be costly and time-consuming.

Customer crisis

Beaumont’s research focused on the impact of the 2008 financial crisis on French B2B (business-to-business) firms. These companies exported more than 9,000 products to 600,000 customers across the European Union. When the recession hit, world trade experienced a sudden and severe collapse – the sharpest in recorded history and deepest since World War II. As a result, the companies from Beaumont’s study experienced a sharp loss of customers.

Where did they all go?

It’s hard to say, said Beaumont. But he found that in more competitive markets, firms were less likely to win their customers back after losing them. This suggests that, at least in some cases, buyers found an alternate supplier during that severance period.

“It’s costly to find a supplier,” he said. “As soon as you find a supplier of products that are of sufficient quality, you will stick to that supplier.”

If you run a smartphone company and you need glass for your touchscreen, you’ll have some research to do. Does the glass scratch easily? Is it cost-effective? Is it water-resistant? Identifying the right product can be costly and time-consuming. Once you find a supplier that fits your needs, you likely won’t continue searching.

This means that, once a supplier wins a client, the client is likely to stick around. But once the client is gone, that stickiness will go to another supplier – and it will be hard to win them back.

The cost of (not) doing business

After the 2008 financial crisis, some of the firms in Beaumont’s study were able to win back their clients easily. Some weren’t. The difference came down to financial capital and competition.

“You can view recessions as being a shock on the intensity of competition,” said Beaumont.

Firms in more competitive industries found it difficult to pry old customers away from their new suppliers. The recession was the push they needed to spend resources finding alternatives. In some cases, they found less expensive and higher quality products than their pre-recession supplier could provide – giving them little incentive to rekindle their previous business relationship.

Conversely, suppliers in less competitive industries found it easier to win back their customers. Customers in these markets had less choice, and saw less quality fluctuation between suppliers. So there was a higher likelihood that they would return to their previous relationship.

In all cases, suppliers still had to work to win back their customers. It was just a matter of how much.

“You can either lower prices, or you can improve quality,” said Beaumont.

But to do either of those things, suppliers need the financial means to do so. And after losing clients during a global economic recession, they may not necessarily have the financial capital to improve their product or accept lower prices.

This contributes to a potentially vicious cycle. Firms lose customer capital during a recession, which leads to revenue losses. And because of those revenue losses, they struggle to rebuild their customer capital – extending the long-term impacts of recessions on their profitability.

This is an intuitive concept, said Beaumont. It seems obvious that customer capital would have a profound effect on a firm’s post-recession performance. And yet, there’s a dearth of research documenting the impacts of customer capital on firms and economies.

“Customer capital is an important object,” he said. “We still know very little about this concept, and how to understand it.”

For now, Professor Beaumont’s paper is a start.