#34 Switching Costs: 4th of the 7 Powers
This is the fourth post on a series that summarizes the book 7 Powers by Hamilton Helmer.
This post discusses the fourth possible source of power for a business - switching costs.
Switching costs - the value loss a customer must endure by switching from current supplier to an alternate supplier for additional purchases. Switching costs are a non-exclusive power type i.e. it is available to all players.
Why does switching costs result in Power?
Benefit: A company with embedded switching costs for its current customers can charge higher prices than competitors for equivalent products or services. Switching costs offer no benefit to the supplier if no additional related sales are made to the customer.
Barrier: To offer an equivalent product, competitors must compensate customers for switching costs.
Types of switching costs:
Financial costs: costs that be objectively measured in financial terms. For example, if you want to switch from Android to iOS on your phone, you need to purchase an iPhone.
Procedural costs: costs associated with lack of familiarity with the new product and any risk and uncertainty associated with the adoption of the new product. While these costs may be difficult to quantify, they are a significant factor in the switch/stay decision making process. For example, when you switch from a Windows laptop to a Macbook, you will take sometime to carry out tasks with the same fluency as you did on Windows.
Relational costs: costs associated with breaking the emotional bonds and identity that is built up through the use of the product and through interactions with other users and service providers. For example, would switch support to a different sporting team?
In order to leverage the benefits of switching costs, suppliers typically develop add-on products or acquire other companies to accelerate product line extensions - so that they can be offered/sold to their existing customers.
The power intensity determinants:
Industry Economics: Intensity or magnitude of switching costs
Competitive Position: Number of current customers