4 types of switching cost costing you moneyApr 19, 2023
When prospecting or exploring new relationships,
we always ask about money.
But what about the time and other hidden costs to switching?
Today we break down 4 types of switching costs you should watch out for.
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4 types of switching cost costing you money
Growing up, I was a diehard sports fan.
From the day I was born, I lived and died by Oklahoma State University sports.
One of my earliest sports memories is going to Gallagher Iba Arena and seeing “Big Country” Bryant Reeves and my Cowboys beat the #2 ranked Kansas Jayhawks. I believe, to this day, there is still no basketball arena as loud as the old Gallagher Iba Arena.
BTW, who wants to bring the flat top back with me? Reply if interested.
My fandom was never really a choice: my grandfather was a professor at the school and both my parents went there.
While I wasn’t exactly committed to school, my brother very much was. I like to tell the story of how, as valedictorian, he chose Oklahoma State over MIT and other elite schools.
Like I said… where we went to college was never a choice. We were going to Oklahoma State.
And we loved it (and still do).
But, for years and years and years, we were horrible at football. So, naturally, I grew up more of a basketball fan.
Then, in 2011, that all changed.
We had Brandon Weeden, Dez Bryant, and too many more legends to name. If not for a university tragedy that contributed to a misstep in Ames, Iowa, leaving one blemish on an otherwise perfect season, Oklahoma State would have been playing for a national title.
As a result of that, the playoffs were implemented as we see them today.
But that’s not what I’m here to talk about… I’m here to talk about switching cost.
You see, the next year I arrived early to the first game. A few hours before the games they have “the walk” where the team walks down Hester Street with the band and fans surrounding them.
What a perfect college experience!
As I walked down the street towards the stadium, I noticed a family. This family looked just a bit out of place. They looked lost, like they didn’t know where to go.
I quickly noticed something else weird: all their clothes were brand new.
As an Oklahoma State fan, we grew up as the perceived “stepchild” to the bigger and more successful University of Oklahoma (OU or Sooners)).
Because of OU’s success, it seemed almost everyone in Oklahoma City claimed to be an OU fan. The thing is, many of them never went to the school. As an Oklahoma State guy, we had pride that “we went there,” almost as if not going to the school made you a lesser fan.
They were only fans because they won. This, as a child, was our perception of OU fans.
So here I am, back on this street in 2011. I see these fans and the first thing that pops into my head was “last year they were cheering for the Sooners.”
To make the switch to becoming a Cowboy fan, they had to make all sorts of changes:
- Buy new clothes
- Drive to a new place
- Learn new customs/cheers
- Share their new allegiance with friends
- Cheer when a different team scored
These are switching costs.
In business, these are the costs associated with changing suppliers, products, or services.
This concept applies to both you, your vendors, and your customers.
When you implement new software, there is a switching cost for the business.
When you try and take a customer from a competitor, that customer Has switching cost as well.
When a customer leaves you, the switching cost could make that easy or hard.
In each one of these relationships, we have a different focus.
When implementing new software, we want to understand and mitigate the cost.
When trying to get a new customer, we want to minimize the cost for them.
When trying to keep a customer, we want to increase their cost to switch so we can keep them.
We’ll likely address each scenario more specifically in future issues, but for now we’re going to talk about what types of switching costs there are.
Financial — “Buy new clothes” cost
The first thing this family had to do was throw out the old gear and buy new gear.
Unless they took out a second mortgage to buy a suite (I wouldn’t put it past a Sooner), they can just throw the old out and buy the new.
But with a business, there is often a long-term contract or agreement in play when switching. Much of this is a sunk cost, meaning you shouldn’t suffer just because you already paid, but there could also be additional costs for breaking a contract.
The new solution likely costs, plus the additional cost of upgrades of current equipment or software to be compatible with what you’re switching to.
“Drive to a new place” cost
For years, this family knew exactly how to get to Norman, Oklahoma, where the Sooners are located. Now, they have to figure out how to get to Stillwater, where the Cowboys are.
While not difficult, it may take longer (depending on where they’re coming from) and they’ll have to learn their way around town.
In the same way, any switch in a business is going to make people uncomfortable. They’ll have to:
- Research the solutions
- Pick a solution
- Plan the switch
- Make the switch
Each of these phases takes time and effort. Depending on how complex the solution is, it could take months or years to implement the new solution.
“New cheer” cost
Being in a new stadium, the family likely experienced culture shock. Some will be easy (the Cowboys shout “Orange Power” instead of “Boomer Sooner”), but others will be more difficult (like the Cowboys singing a Garth Brooks song to start the 4th quarter — you’re telling me I have to memorize a song?!?!).
In the same way with business, things will be different after the switch.
Not only will you be learning a new software/solution, but you’ll be learning a new language.
And everyone will need to learn that language.
Then you have the training and the slower workflow as people learn it.
Network — “Reputation” cost
This family likely has friends cheering for the Sooners and those friends are likely annoyed by their switch. Can the friendships survive? We’ll never know….
In the same way, businesses have networks and tools that interact with the old solution.
If you move to a solution and know no one else using it, there is actually a pretty big risk there! Weirdly, social status can be associated with certain solutions. Ever go to a vendor conference? Those relationships are now cut off.
When you break other integrations, you have to figure out how get around the break or do something different. This can be extremely frustrating for employees, especially if not planned out in advance.
Psychological — “I can’t remember who I’m cheering for” cost
Have you ever gone to an “away” game in a stadium or arena? Did you ever catch yourself “cheering” for the Home team, the one you definitely weren’t cheering for?
Familiarity with a solution also has the same effect.
Our brain falls into comfortable patterns and changing solutions breaks those patterns.
For months, employees will work slower than they had before. They’ll get frustrated that their favorite tricks no longer work.
Depending on their personality, it can be exhausting. It can change their relationship with their work.
Uncertainty — “What if they stink again?” cost
Being an Oklahoma State fan, I cringed when I saw the family. Not just because of my negative biases towards the Sooners, but because of my negative bias towards my Cowboys.
You see, I know that historically we’ve been bad. So I always know that risk of going back is high. What happens if they make the switch and we’re bad again?
In the same way, with business, there is uncertainty about whether you’ve made a good choice. When doing the research, you’re always looking for reasons to disqualify new solutions, as well as qualify them.
This is a cloud during the process but also hangs around for months (maybe years?) afterward.
Switching costs is important to all sides of the coin for different reasons.
When selling, look for ways to reduce load of switch.
- Offer migration packages
- Address common concerns
- Seek to understand their current system
When the incumbent, look for ethical ways to increase it:
- Get them to use more features
- Build collaborative relationships
- Assure full understanding of what you offer
When looking at new vendors, seek to understand it:
- Take your time
- Get hands-on experience
- Include your current vendor in the process
Properly assessing switching cost is can make or break a project.
Overestimating the cost could mean a beneficial switch is passed on.
Underestimating it could mean a bad switch is made.
It’s important to acknowledge and address all of these risks.
Hopefully this got you a little closer to understanding them.
- I know no one else probably cares but me, but just know I’ll be spending (if I haven’t already) an hour and a half watching this video. It’s the full video of the 1995 game I mentioned at the start of the article. Wild that Youtube would have something like that!
- Cal Newport is one of the best thinkers of this time, with books like Deep Work, Digital Minimalism, and A World Without Email. So, when I saw he wrote about ChatGPT, I was all ears. He says ChatGPT won’t replace us, but overall I think is analysis is a bit of a narrow scope. Give it a read and let me know what you think.
- Michael Batnick wrote an article on the role of “luck” in our lives. One common string with luck is that when we have it we’ve put ourselves in that position. While Michael was lucky, was “shooting his shot.” Always enjoy thinking about the role of luck and thought you might too.
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