Understanding switching costs


One area that I think founders tend to ignore is switching costs for their customers. Virtually any customer for any product or service is already using something, another product or service or perhaps performing the task manually or using some other substitute.

Understanding your customers’ costs in switching from the way the are doing things now to using your product or service is key to overcoming sales objections.

For example, let’s say you are selling software. Your potential customers are likely using someone else’s software. So switching costs would include such things as moving data from their app to your app, without losing formatting, tags or other attributes (tried getting your data out of Basecamp?), learning a new UI, interoperability with other software they are using, dealing with a different support plan and so on.

Investopedia defines switching costs:

Switching costs are the costs that a consumer incurs as a result of changing brands, suppliers or products. Although most prevalent switching costs are monetary in nature, there are also psychological, effort- and time-based switching costs. A switching cost can manifest itself in the form of significant time and effort necessary to change suppliers, the risk of disrupting normal operations of a business during a transition period, high cancellation fees, and a failure to obtain similar replacement of products or services.

Microsoft was a master of understanding and overcoming switching costs in the PC business as first they attacked wordprocessing incumbent WordPerfect, then spreadsheet incumbent Lotus, by providing a built-in help file in Microsoft Word and Excel to help users of competitive product switch to Microsoft products.

So whatever customer problem you plan to solve, understand how your potential customers are solving it now and what their costs would be to switch to your solution.

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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