Switching Costs - Meaning, Importance, Types & Example
Published by MBA Skool Team, Last Updated: September 03, 2021
What is Switching Costs?
Switching Costs are the direct or indirect costs borne by customer or user due to the decision of switching from one brand or product to another competitive or complementary option. These costs may be quantifiable or non-quantifiable.
This is also important from the perspective of the brands which use higher switching costs as a strategy to ensure that the customer doesn't switch easily.
The switching costs are quite important in marketing as competitors of a product need to know the cost it would take to get the customer to use their product. This would require customer switch to the newer option. If the switching costs are high then it would not be be possible for competitors to sell their product unless there is a a lot of value and a clear USP.
In case such costs are low, then it would be easier for the competitors to sell may be through a discount or offer which customer would be willing to try.
Types of Switching costs
Different types of switching costs are as follows:
1. Financial Cost
Many a times switching costs are financial in nature in terms of dollar value. A person may like another product or brand more than the current one but the newer product may be costlier as there would be more features. Losing value on the current product and buying a new one will lead to financial costs.
Social switching costs can be pertaining to something an individual will pay as part of being different from the similar group. e.g. if all friends of a person use a particular gaming console and the person buys another console which may be better can risk losing out on social interactions as the person may not be able to play with them.
3. Psychological or Emotional
Sometimes, a person uses or interacts with a brand and forms an attachment. In order to switch the person would have to leave this brand and find a new one. In the process, new individuals and features may come which may not be easy to interact. This can be termed as emotional switching cost.
Many companies would charge fees for leaving the current brand. It happens especially where there are contracts and leases. If a person leaves or transfers there would be some exit fees or cost which would have to be paid before making the switch leading to costs.
Sometimes when a switch to a different brand happens, it also leads to addition of additional peripheral equipment leading to higher costs. An example can be when a person buys a high power air conditioner, there might even be an additional cost of buying a power stabilizer along with it to ensure that it works well and securely. This would lead not only to additional AC cost but also the cost of the additional equipment.
Examples of Switching Costs
There are several examples that can be used to explain switching cost.
Baby products is a product category where consumers find switching cost to be high. With baby care being the highest priority, switching from a tried and tested brand or product to another has several psychological risks associated with buyers and physical risk associated with babies.
Another example can be a smartphone. Using a brand for a long time, makes customer accustomed to the overall features and way of working. Even on upgrades, experience become better and continues. If a person switches to a another brand, the experience might be different and there might be continuity issues. This was especially seen when lot of people moved from feature phones to smartphones in the middle age group.
Hence, this concludes the definition of Switching Costs along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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