The Strategist

Meta Leadership Primer: Switching Costs

06/11/2019 - 13:27

Simply put, switching costs are the costs that will pass to the consumer as a result of changing products, suppliers or brands. The truth is that even though the vast majority of switching costs are expressed in a monetary way, there are other types of costs such as time-based, effort, and psychological.

Let’s say that you want to switch your supplier. The switch cost will pass to the customer in many different ways. You will take time to find a new supplier and this time may lead to high cancellation fees since you may not be able to find a good replacement for your products during this transition period.

Brands have been focused on this

The truth is that big companies such as Rolls Royce, Microsoft, Salesforce, Adobe, among many others have already realized that just having a good product or service is not enough to continually attract new customers. They need to have a good business model that allows them not only to attract but to retain customers as well.

What these companies discovered is that when they implement strategies that build in ties to their services, they are lowering their customer acquisition costs and, at the same time, they are making more money from returning customers. On the customers’ side, they stay locked into the ecosystem because it is more expensive and time-consuming for them to switch.

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Think about this on personal level.

Whether you have an Android or an Iphone you have already entrenched yourself to the applications and services most of the time without even realizing it. If you are into entertainment for example. You have a music collection on Itunes, maybe you have bought a few episodes of a tv shows, movies or even audiobooks. If you have ever considered switching to an android phone, the extensive psychological as well as financial impact this has regarding efforts to transition all of your media over to the google platform is untenable.

The same rings (pun intended true) for those on Android phones with extensive content spread across the Google ecosystem. This is a very personal example of the power of integrating more and more products or services into your customers routines and lives. The prohibitive cost of change both from a time, financial and complexity perspective is most often just not worth it.

Different Types Of Switching Costs

Depending on the existence of similar products of the competition as well as on the ease of transfer, switching costs can be classified as:

#1: Low Switching Costs:

When a company is offering services or products that can easily be replicated by its competitors at the same price level, it has low switching costs. One of the best examples that we can give you are apparel companies. If you think about it, there are many different stores where you can buy clothes and you can easily compare their prices. In addition, the Internet has made their switching costs to be even lower.

#2: High Switching Costs:

When a company is able to create a unique product or service that have almost no competition or that require a significant effort to replicate, it has a high switching cost. Just think about Intuit bookkeeping software, for example. As soon as you are a customer, you will need to take time to learn their applications as well as you have training costs. So, it will be hard to switch away from the company.

The Main Benefits of Raising Switching Costs

The truth is that you have a lot of benefits when you increase your switching costs. The main ones include:

- You will become the go-to company. Since you face none or low competition, you can be sure that your company will be the first one that the customer remembers to solve his problem.

- You will decrease the cost of acquisition of new customers. When you are able to create a unique product or service, people will come to you. In addition, you will have a lot more returning customers which end up reducing your acquisition costs for new ones and as an added benefit overall customer retention expands manifold. That’s #metaleadership. If you can implement this strategy into your current business or organizational practices you will definitely reap the benefits thereof.

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