switching cost

Popular Terms
Fixed cost incurred by a buyer when changing suppliers, because the buyer's product specifications, production equipment, and purchasing cycle is closely tied to the current supplier's products and operations.

Notable Quotable

Switching Costs 101
"Switching costs (that is, the expenses that would be incurred if a customer switched to a different provider) are a negative for the customer, but can be a negative or a positive for the provider. On the plus side, switching costs make customers more likely to stay with the provider. On the minus side, this can make it more difficult to acquire the customer to begin with, as the customer will be more cautious about committing, and other providers may compete more aggressively to acquire the valuable customer. In those cases where the provider has some choice, selection of magnitude of switching costs is a strategic decision. The ideal case for the provider is one in which the product or service is perceived to have little or no lock-in, but where the actual lock-in is high or rises over time."
- Tom Murcko
Locking In Customers
"Customer lock-in (that is, their cost to switch to another provider) is an important concept in business. If lock-in is low you're less likely to be able to retain the customer, but if lock-in is thought to be high then the initial sale will be more difficult. Where switching costs are high it's easier to get a new customer than to get a customer to switch from another provider. First-mover advantages are especially powerful in markets with high lock-in.
The ability to detect switching costs and predict how they'll change as time passes is an important business skill. Some types of lock-in rise over time (called creeping lock-in), others fall. Here are some examples of each: contractual commitments (falls over time), durable purchases (falls), brand-specific training (rises), information and databases (rises), and loyalty programs (can rise or fall).
For example, as a supplier, switching costs are the key to valuing your installed base. As a buyer, show the seller you understand how you'll be locked in with them, and explain what your switching costs would be from your current vendor, and use these factors to negotiate a better deal."
- Tom Murcko

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