Business

Switching Costs

Switching costs is a term that sums up the costs that a consumer has to incur in order to change supplier for a particular product. It also encompasses the cost of switching between brands or products. These costs are primarily represented in monetary terms i.e. the price difference the consumer has to pay once he/she shits to a different supplier or brand. Switching cost also include time, convenient, effort and most importantly psychological hurdles in switching.

Looking from a business’s perceptive, high switching costs would mean that is going to be difficult for customers to switch to other brands or products. Businesses frequently employ tactics and strategies to make sure that switching cost is high, since it would dissuade customers from switching to competitor’s products. For example, in U.S. cellular service providers bound users by asking them to sign a year-long contract, which comes with a heavy penalty in case of cancellation. This example represents high monetary switching costs, which will discourage from making the switch. In the same manner, other brands and services try to bind customers through contracts or heavy cancellation fees in order to keep the switching cost high.

Categories of Switching Costs

Switching cost is a product of consumer’s desire for substitution between the current product and the previous product. The consumer, since having already purchased the product in the past, has set up a relationship and has made informational investment with the supplier. The consumer is well-acquainted with the product, the supplier, characteristics, which makes it difficult for the consumer to readily make the switch. Customer’s need for compatibility can be demonstrated with the help of the following example: Components of a security system must be compatible with each other, which means it is not possible to purchase various components from various suppliers. An Apple microchip processor won’t work with HP personal computer.

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Moreover, transaction costs are involved which further discourage customers from switching. For example, a new gym membership with a different gym would require the customer to pay the registration fee once he decides to make the switch. Once the switch is make, the cost of learning is also very important consideration for the customers, since he/she would have to learn all the procedure as to how a product works or understand the culture of the new business in case of a service.

Once the switch is made, the customer faces uncertainty about the quality of the product and services, since for the customer it is a new experience and a gamble to try a new supplier.

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