Switching Costs, Breaking down and Example

SWITCHING COST:

A simple definition of Switching cost, also known as Switching barrier, is by Thompson and Cats-Baril who define Switching costs as “the costs associated with switching supplier”. On the same lines, Farrell and Klemperer refer to switching cost as “a consumer faces a switching cost between sellers when an investment specific to his current seller must be duplicated for a new seller”.

In short, switching costs are any costs – tangible or intangible – that a customer has to bear when changing between brands, products or suppliers. Since a buyer’s product specification, purchasing cycle, production equipment, and operation, switching between suppliers is bound to cost money, time, effort and other factors to the buyer and this cost is referred to as switching cost for the buyer.

Although most prevalent switching cost are monetary in nature, there are psychological, effort and time based switching costs.

Breaking Down ‘Switching Costs’.

Successful companies typically try to employ strategies that incur high switching costs on the part of consumers to dissuade them from switching to a competitor’s product, brand or service.

Switching costs are the building blocks of competitive advantage and pricing power of companies. Firm strives to make switching costs as high as possible for their customer, which lets them lock customers in their products and raise prices every year without worrying that their customers will find better alternatives with similar characteristics or at similar price points.

Example:

If you are comfortable with Windows operating system, you will not shift to Mac-book because of huge time spent and huge switching cost associated with learning a new product. However, if you wanted to try a new soap, you can do that with no cost associated to the switching.