Switching costs or switching barriers are terms used in
microeconomics
Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics focu ...
,
strategic management
In the field of management, strategic management involves the formulation and implementation of the major goals and initiatives taken by an organization's managers on behalf of stakeholders, based on consideration of resources and an assessment ...
, and
marketing
Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to empha ...
. They may be defined as the disadvantages or expenses consumers feel they experience, along with the economic and psychological costs of switching from one alternative to another.
For example, when telephone service providers also offer Internet access as a package deal they are adding value to their service. A barrier to switching is then formed as swapping internet services providers is a time consuming effort. There are a range of different switching costs that fall under three main categories: procedural switching barriers, financial switching barriers, and relational switching barriers.
Procedural switching barriers refer to the time and resources associated with changing to a new provider; financial switching barriers refer to the loss of financially measurable resources; and relational switching barriers look at the emotional inconvenience from the breaking of bonds and loss of identity.
Types of switching barriers
Procedural switching barriers
Procedural switching barriers emerge from the buyer’s decision-making process and the execution of their decision.
Procedural switching barriers consist of: economic risk, learning, and setup costs, evaluation, this type of switching cost primarily involves the expenditure of time and effort.
There are a number of switching costs or facets that fall under procedural switching barriers. Uncertainty costs refer to the perceived likelihood of acquiring a lesser performance and quality when switching.
They have the potential to prevent a customer from switching.
Pre-switching search and evaluation costs refer to the time and effort costs associated with the search and evaluations required to make a switching decision.
Post-switching behavioural and cognitive costs envision the time and effort needed to become familiar with a new service routine when switching occurs.
Setup costs refer to the time and effort costs related to the process of establishing a new product for initial use or forming a relationship with a new provider.
Financial switching barriers
Financial switching barriers involve the loss of financially measurable resources.
There are two facets of financial switching barriers.
Sunk costs
In economics and business decision-making, a sunk cost (also known as retrospective cost) is a cost that has already been incurred and cannot be recovered. Sunk costs are contrasted with '' prospective costs'', which are future costs that may be ...
are the considerations of costs and investments already incurred in initiating and maintaining relationships.
Lost performance costs refer to the perceived liberties and benefits lost as a result of switching.
Relational switching barriers
Relational switching barriers include the psychological or emotional discomfort caused by terminating a relationship and the breaking of bonds, along with the time and effort involved in and forming a new relationship.
There are two facets of relational switching barriers. Brand relationship loss costs are the losses associated with severing the bonds of identification that have been developed alongside the brand with which a customer has associated.
These bonds are lost when switching providers. Personal relationship loss costs are the losses and discomfort associated with switching to a provider that a consumer is not familiar with, as familiarity creates comfort for the consumer.
Collective switching barriers
Collective switching costs are a unique macro form of switching barriers, appearing when the market presents collective externalities towards a service or product, and represents the combined switching costs of all entities in the market. These costs affect the competition by improving incumbents and withholding new entrants into the market, who must overcome individual and collective switching costs to advance in the market.
In the presence of the product/ service externalities, participation in the dominant product or service provides the most value, while at the same time, it increases the value of the product or service.
As a group, entities face collective switching costs that surpass the sum of the individual costs, because unless a coordinated desertion takes place, any individual deserter finds themselves cut out of the collective use of the product / service and its benefits.
See also
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Barriers to entry
In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or hav ...
*
Barriers to exit
In economics, barriers to exit are obstacles in the path of a firm that wants to leave a given market or industrial sector. These obstacles often have associated costs, prohibiting the firm from leaving the market. If the barriers of exit are sign ...
*
Closed platform
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Job lock
The term job lock is used to describe the inability of an employee to freely leave a job because doing so will result in the loss of employee benefits (usually health or retirement related). In a broader sense, job lock may describe the situatio ...
*
Porter 5 forces analysis
Porter's Five Forces Framework is a method of analysing the operating environment of a competition of a business. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, ...
*
Transaction cost
In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike pr ...
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Vendor lock-in
In economics, vendor lock-in, also known as proprietary lock-in or customer lock-in, makes a customer dependent on a vendor for products, unable to use another vendor without substantial switching costs.
The use of open standards and alternative ...
References
Further reading
* Carl Shapiro and Hal R. Varian (1999). ''Information Rules'', Boston: Harvard Business School Press.
* John T. Gourville (2003).
Why Consumers Don't Buy: The Psychology of New Product Adoption" Harvard Business School Case No. 504-056. (Revised April 5, 2004).
* Andy Grove, (July 21, 2003).
Churning Things Up" ''Fortune''. Retrieved 13 December 2012.
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Strategic management
Monopoly (economics)
Marketing strategy