What are switching costs?
Switching costs are the costs, or difficulties, associated with changing suppliers for a particular product or service. They may be monetary in nature – potentially termination fees to end a contract – or they may be other challenges such as learning a new platform.
The impact of switching costs on customers
The key impact that switching costs have on customers is that they lock customers into a particular supplier. Rather than being easy to move to an alternative option, switching costs increase the friction with moving between firms – increasing the likelihood that a customer will remain with their existing supplier.
The impact of being locked in is that customers can be dependent on their supplier – potentially allowing the supplier to charge a higher price. If it is particularly difficult for you to move to a different company for a product or service, then the price that ends up being charge may be higher than if it were easy to change firms.
The impact of switching costs on existing firms
Similar to their impact on customers, switching costs impact existing firms. Things that make it difficult for customers to switch to a different supplier help retain customers – making it less likely that they will opt to move to a different firm.
While switching costs may be bad from the perspective of customers – making it difficult to move to a cheaper alternative – from the perspective of existing customers, this may be an advantage, allowing a higher price to be charged than if it were easy for customers to move to a different firm.
The impact of switching costs on new companies: Barrier to entry
Switching costs can also have an important impact on new firms due to the entry barriers that switching costs create. Entry barriers are the additional challenges that new firms face in entering a market, and switching costs are one way that it becomes harder for new firms to enter the market – it is hard to get existing customers to switch from their existing supplier to the new firm.
This article explores the impact that high switching costs can have on industry entry barriers – why high switching costs can make it difficult for new firms to enter the market.
Switching costs essentially lock customers into a particular supplier, increasing the difficulty to change suppliers. This article explores the impact of switching costs and the various barriers to changing suppliers.
This article explores some of the most common forms of switching costs – from termination fees to effort to relearn a new system.
This article explores the importance of switching costs to the razor and razorblade business model – with examples of such switching costs.
This article explores some of the reasons why customers tend to remain with subscription service for long periods, with examples of the difficulties in switching service.
This article explores the role of entry barriers and mobility barriers at preventing new firms from entering your market, or existing firms from converging on your position.
This article explores the ways that business cost can mount, and particle approaches for reducing costs within an organization.
This article explores approaches for new firms to overcome entry barriers – to work around difficulties that traditionally make it hard for new firms to successfully enter an industry with high barriers to entry.
This article explores industry entry barriers: What entry barriers are, why you need to be aware of them, and how to overcome the barriers.