So, you’ve recently launched your product and by all indication, it should be a resounding success. Market surveys and analysis done before you launched gave a high indication for demand. A buzz has been created on social media attracting much pre-launch followership across the channels. For that reason, you set up an automation processes to cater to the flurry of online sales being anticipated. You’ve worked hard for this over the last 2years and now its Payday!
Its Day 31 post-launch and website visit has been as expected but less than 5% sales conversions! What is happening? Backtracking a bit with your team, it seems all processes where checked. Next step, the Marketing Consultant. Everywhere you check, all seems to be as planned, but why are the results at great variance with the projected??
Panic!!
Then it hits: What cost does the customer have to pay to switch to our product? Am I saving them only just money? What about time or convenience?
I sometimes call Switching Costs a “Double-edged Sword”. Why? Because it can either be used as a barrier to loosing out to competition or a sour point where competition can undo your offering – depending on the set-up approach you take.
Switching Costs: A Double-edged Sword
Let’s consider this case.
It’s 3PM!
Osato Tsademe is pacing across the length of his executive office in Parkview estate. Being recently promoted as the Chief Innovation Officer – Yith Tech Company, the responsibility for the operational efficiency of the innovation startup rests squarely on his shoulder.
Osato is frantic as technology as he has so come to love and build his future on, now seems to be his undoing. There seems no way he would be able to meet with tomorrow’s deadline for the company’s annual review meeting that has foreign investors in attendance.
In a quick memory jog, he remembered how he stumbled upon his first Java textbook in his friend’s room and it was love at first sight. Not even being a 200-level Law student could stop that raw passion to learn codes. His love for technology had always pushed him to the fringe, daring tech-feats only seen in the movies. One of such was activating voice dialing as access codes to all his work tools as an extra layer of security. Through voice, he could activate his phone to call into any of his devices using IoT. It always caused a stir when just by a voice-command, he could dial up and access any tool, office or home. Now that’s upscale.
Ping! Ping!!
A beep on Osato’s mobile device interrupted his train of thoughts. That sound could only mean one thing. An interlude that restored network connectivity back to his phone could enable him dial up his system! Quickly, he jumped on his PC and got back to work. Brows furrowed, eyes focused, Osato heaved a sigh of relief that he wouldn’t disappoint at tomorrow’s meeting. A quick trip to the rest room an hour later turned to a disaster as upon return, no network connectivity was available to activate his PC.
Frustrated, he thinks of migrating to another network provider after a quick discussion with the voice-dialing security company. Osato had been on Y-Network for over 10 years and had enjoyed the best of service. Never had he thought of using another network or owning a backup line. Y-Network in turn had treated Osato as a valued client, giving loyalty bonuses and privileged offering in appreciation of his patronage. Now, Y-network couldn’t render any special favours. Obviously, changing his line was out of the question. It only meant retaining his line but under a new service provider. Surely, this could be a quick 2-hour change, or so he thought!
At XYZ Networks, the pleasant receptionist gives him the list of requirements:
- Photocopies of a valid ID
- 2-page Mobile Number Portability (MNP) form
- 24-hour processing time.
Osato apparently can’t bear the Cost of Processing time. Was this deliberately agreed across the industry to deter consumers from “porting” across networks? Can XYZ Networks reduce this cost for Osato by shortening the time? As time ticks, Osato’s options run thin.
Switching Cost
Switching costs appear and are incurred in the process of changing from one product / service to another. Companies usually leverage it as a strategy to checkmate competition either through customer inducement or discouragement. Many customers, although dissatisfied, have remained loyal to some brands for this reason. As a business owner, do you have a strategy to increase the switching cost and dissuade your customers from patronizing competition?
Here are some good switching costs you should consider over pricing;
- Convenience –
Customers, although not 100% percent satisfied with a product, will stick to the brand because of convenience. A competitive strategy Dominos Pizza leveraged early at inception to gain some of the market share from Pizza Hut was door delivery. Today, that strategy in Nigeria has morphed to geographic spread. Being fast food, the easy in access and options created by Dominos has been a major driver for its larger market share and customer loyalty. Convenience could also be seen in the cost of set up, add-on services, inter-connectivity, etc.
- Effort-based cost
How easy is it to on-board your clients? Does it cost him hours pouring over lengthy complex agreements or simplified documentation that can be activated with a click of the button? In the Fintech space, Lendtechs have perfected the art of simplified loan documentation over lengthy documents required by traditional banks. Account opening requirements? More financial institutions are making effort to catch up with the innovations provided by Fintech by dumping bureaucracies that seemed impossible to bypass.
- Emotional cost
Building a memorable experience when consumers encounter your product can sometimes overshadow its financial costs. How do you want your customers to feel when they relate with you? Exclusive like in Louis Vuitton, refreshed by chilled bottle of Coke, or luxurious as in a night at Burj Al Arab hotel? The emotions you purvey in a customer builds a less imitable resource for your company and is more effective (cost and otherwise) in building long-term loyalty.
- Monetary cost
This may be an applicable fee applied to customers who no longer want your services. While this may provide some attempt to discourage a customer on exit, note that a dissatisfied customer would willingly absorb the cost to get away from a horrible encounter.
Switching costs may not always be punitive in effect. I would recommend a healthy balance, leading more towards value. Brands should have Value Added Services to encourage repeat patronage and customer loyalty.
So, Osato is still in his dilemma, not just on the path to take now, but what would be his long term relationship with network providers afterwards. How could things have been done differently by the service provider? As a business owner, how do you leverage the concept of switching costs to gain and maintain competitive advantage?
Book a consultation with us to review the way you compete and how you can build more loyalty among your customers.