What is Capital Decay?
Capital decay occurs when a company's revenue suffers due to its use of old technology or processes.
How Does Capital Decay Work?
Let's say John Doe opens an ice cream stand. He buys a basic cash register at the office supply store and decides to operate on a cash-only basis. John pours $200,000 into building his stand.
Customers start to arrive at the beginning of summer. The ice cream is delicious and the location is perfect, but once they see John's 'cash only' sign, they go elsewhere so they can use their debit cards, credit cards and electronic wallets. John's sales suffer as a result. He experiences capital decay.
Why Does Capital Decay Matter?
John's example is simplistic, but the results are common for many companies -- invest in one type of technology only to find something new and better next year that requires a complete retrofit just to keep up competitively. As you can see, capital decay costs companies money to get the latest technology, but it may be necessary in order to attract and process customers and information.