Customer-Base Concentration, Profitability and the Relationship Life Cycle

47 Pages Posted: 31 Oct 2013 Last revised: 25 Jan 2017

See all articles by Paul J. Irvine

Paul J. Irvine

Neeley School of Business

Shawn Saeyeul Park

Yonsei University

Çelim Yıldızhan

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Date Written: July 30, 2015

Abstract

Using a recently expanded data set on supplier-customer links, we introduce a dynamic relationship life-cycle hypothesis. We hypothesize that the relation between customer-base concentration and profitability is significantly negative in the early years of the relationship, but becomes positive as the relationship matures. The key driver of this dynamic is the customer-specific investments that the relationship entails. These investments result in larger fixed costs, greater operating leverage and a higher probability of losses early in the relationship, but can significantly benefit the firm as the relationship matures. Although many of these money-losing firms in early-stage relationships were not studied in Patatoukas (2012), we find a market reaction to increases in customer concentration similar to that in his paper. This result provides powerful confirmatory evidence of the value of customer concentration. We document one of the intangible benefits of customer concentration, technology sharing, and show how this benefit increases as the relationship matures.

Keywords: Customer concentration, customer-specific investments, relationship life-cycle, selling, general and administrative expenses, pro…fitability, default risk

JEL Classification: L25; M41; G31; G33

Suggested Citation

Irvine, Paul J. and Park, Shawn Saeyeul and Yıldızhan, Çelim, Customer-Base Concentration, Profitability and the Relationship Life Cycle (July 30, 2015). The Accounting Review: May 2016, Vol. 91, No. 3, pp. 883-906. Available at SSRN: https://ssrn.com/abstract=2347095 or http://dx.doi.org/10.2139/ssrn.2347095

Paul J. Irvine (Contact Author)

Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Shawn Saeyeul Park

Yonsei University ( email )

Seoul
Korea, Republic of (South Korea)

Çelim Yıldızhan

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

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