Broadly speaking, switching costs are the costs that customers anticipate in switching from one company to another. While this is often interpreted as a hard, one-time cost, such as buying new equipment or paying a contract cancellation fee, there are also perceived emotional, psychological and social costs in switching providers. Combining these ideas together, marketers have been able to convince customers that the time and effort to switch is “just not worth it”, improving their overall margins and customer retention.
A group of researchers from Santa Clara University, the University of Maryland and the University of Texas at Austin have published a remarkably comprehensive, three-tier typology to help businesses understand how to both think and apply switching costs to their own business models.
It’s advantageous to consider these opportunities as an existing provider who wishes to increase the retention of their own customers, and a challenger eager to win over new customers from competitors.
Add Process Costs
The time and effort consumers associate with switching. These costs can be incurred while researching new providers, setting-up and learning how to use a new product or service or even accepting the uncertainty and risk of a negative outcome with a new provider.
Consumers perceptions of these switching costs can be strengthened by increasing the perception of product complexity. Firms should target these messages to customers with limited product experience or a history of switching, as those customers may be more sensitive to the undesirable time and effort it takes to switch.
Add Financial Costs
The perceived monetary loss incurred by switching.
The most common example in this category are the one-time payments incurred by switching providers as well as those often involved with adopting a new provider such as deposits or initiation fees. But, customers susceptible to these costs will also consider lost economic benefits of switching, including loyalty status, points, discounts, or awarded benefits that are not afforded to new customers.
Offering bundled products, loyalty programs, and more frequent communication of product or service availability can increase customers’ perceptions of these switching costs. As one example, financial services firms adjust variables such credit card interest rates and payment insurance to manage churn.
Add Relationship Costs
Perhaps the least understood aspect of switching costs are the perceived emotional, psychological, or social discomfort consumers anticipate when switching to a new brand. These can include breaking bonds formed between customers and employees or losing the association or identity with a particular brand.
You can increase the perceived relational costs by emphasizing your distinctiveness among other brands. Research shows that investments in differentiation can increase customers identity and bond with a brand, leading to a reduced desire to seek alternatives. You can also encourage broader product use to increase the breadth a customers’ association and connection to the brand. By offering discounts on cross-sales to existing customers, you benefit both by strengthening the consumers perceived bond with your company as well as mitigating potential trial offers from substitutes.
Burnham, Thomas & Frels, Judy & Mahajan, Vijay. (2003). Consumer Switching Costs: A Typology, Antecedents, and Consequences. Journal of the Academy of Marketing Science. 31. 10.1177/0092070302250897.