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.

High customer switching costs hold out the potential for high short-term 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 a major long-term risk, since switching costs generate no value for the customer. The risk is that the company becomes complaisent and the deterioration of its value proposition is obscured by the switching costs.

When is it useful?

An Example?

For 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?

I want to know more

How can you adapt this concept?