Switching Costs Definition & Explained

What are Switching Costs

Switching costs are costs that occur when the customer change from one product or service to an alternative choice. The switching costs may be the customers’ expenses or disadvantages they experienced when changing the product or service.

In general, switching costs mean costs that occur when someone changes something. The switching costs can be economic and psychological costs (and can be both tangible and intangible) such as financial costs, relational costs, procedural costs, and time costs:

• Financial switching costs are monetary losses when the customers decide to switch.
• Relational switching costs are about psychological or emotional discomfort caused by the relationship between the customers and the brand.
• Procedural switching costs are related to familiarity with the product, when a customer adopts a new product they need to learn how to use a new product.
• Time costs

Understanding the switching costs is very important when the company needs to take market share away from competitors. This is because the switching cost is the barrier of entry when the customer wants to change a product, service, or supplier to an alternative choice.

The lower switching costs the easy to change, and the benefit of adopting a new one must be greater than the switching costs.

High and Low Switching Cost

The level of switching barriers can either be high or low depending on how hard the customers experienced those costs of changing.

Low switching cost is when the product is very similar among products with the same utilities and easy to switch to another. For example, your clothing and shoes.

High switching cost is when the product is unique compared to other products in the same industry. When the company offers a unique product (with the same utilities or better) the customer needs to learn how to use them. For example, changing mobile phone between iOS and Android. Normally, a product with a differentiation strategy comes with a high switching cost.

Switching Costs Examples

Changing mobile phone between iPhone (iOS) and Android phones are the most simply switching costs example. In this example, let’s say you are changing from Android to Apple iPhone, these are your switching costs:

• All purchased apps and games within the android account.
• You need to inevitably migrate something like two-factor authentication to a new phone and any other login.
• You need to relearn everything about the new one such as settings and touchscreen gestures.
• Some features that are iPhone can’t do the same as your android phone.