Customer switching costs

What is it?

Customer Switching Costs are those costs that a customer will have to incur if they switch to another supplier. This makes the customer more “sticky” or loyal than they would be otherwise. They can range from the small inconvenience of changing your number when you change phone company to millions of $ for a corporate considering changing its enterprise software.

When is it useful?

High customer switching costs hold out the likelihood of high profitability, since any competitor will need to discount their price to offset the extra cost a customer will face if they win the business. However there is the risk of complacency with the business. Customer Switching costs are like a moat around your profitability – they give you an edge, tilt the playing field in your advantage. However, they are purely defensive – they will never enable you to win new business

An Example?

AOL benefited from great customer stickiness from its proprietary Instant Messaging feature, but this concealed the fact that it’s value proposition as a premium priced ISP was no longer viable.

How do you do the analysis?

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