Minimize switching costs to maximize value

by Jeff Lash ·

If you want to be a bad product manager, build the “best” product and assume that the customers will come. That’s all that matters to customers, right? Sure, it might seem like a bit of a hassle at first to switch over, but once people will realize how great your product is, they won’t mind at all.

If you want to be a good product manager, understand relevant switching costs and attempt to reduce them as much as possible to improve customer acquisition and perceived value. Every product has a cost, whether implicit or explicit. Even “free” products have a cost, most notably the time a consumer spends learning and using it. People will buy and use products where the value and benefit they get from the product is higher than the cost to them.

In most cases, the main cost is explicit — the price of the product to purchase. However, in many cases, the cost to someone is beyond just what they have to spend and takes into account other factors. These switching costs take multiple different forms:

• Learning cost: A new product might have improved functionality or capability which requires an investment of time and training to take advantage of. Switching from a car automatic to manual transmission may require the driver to learn how to drive a stick-shift. Switching from Windows to OS X may offer some benefits, though there is initially some loss of efficiency at a minimum for even the most experienced computer users. For a computer programmer, coding in a new programming language may offer many benefits, though it will require time to learn the language and potentially cost to purchase resources and training in order to become knowledgeable about the new language.
• Opportunity cost: In some cases, consumers have to deal with mutually exclusive product offerings, and choosing a new one which provides benefits may require losing some benefits their current offering provides. A hospital choosing an electronic medical record system on which to standardize will select the option which best meets their needs, though invariably there will be features and benefits of other systems of which they will miss out. A long-time elite member of one airline’s frequent flyer program considering a switch to another airline as their primary carrier will invariably get some additional benefits with the new program, though will likely have to give up perks of their previous program.
• Implementation cost: The cost of getting to the point where a product can be actually used is often higher than the cost of the product itself and is often a huge consideration in enterprise environments. Installing a new ecommerce system may offer significant improvements for an online retailer, though there will likely be costs in adapting that system to billing, fulfillment, customer service, and related technologies within the organization. Solar roof panels may be an improved option for a homeowner looking to reduce energy costs, but there are significant costs in not only installing the panels themselves but wiring the home’s electrical system to take advantage of the new technology.
• Conversion cost: For some products, data or settings need to be converted from the old to the new product. Switching to a new contact management system involves proper transition of the data from the old to new application to ensure no data is lost or rearranged. Anyone who has avoided upgrading an aging computer knows the cost (in time, and often in money) to convert data and settings to the new version.

Decisions to stick with a current (and often inferior) product rather than switch or upgrade can also be attributed to these more psychological or behavioral reasons:

• Inertia: People in general stick with what makes them comfortable. They use products that have worked well for them, and do things a certain way because they have always done things a certain way. (“My mother always used this brand of pasta sauce, and her mother always used this brand of pasta sauce…”)
• Fear of change: Rather than looking at the benefits of a change, people may look at only the things which can go wrong. (“What if the new detergent doesn’t clean as well as the old one? What if my cell phone number doesn’t get switched properly to my new carrier and I’m without a phone for several days?”)
• Overestimation of the difficulty of the change: Some changes can seem more daunting than they actually are. If consumers do not have a clear picture of what the change requires, they may resist. (“I’d like to switch to a new bank account with higher interest rates, though I can’t bear to think of the hassle of changing my direct deposit setup and automatic bill payments.”)

Switching costs are relevant for most products in some form. Even with totally new and groundbreaking products, consumers are switching from some other prior option, even if not a direct competitor. (Consumers using ZipCar for the first time, for example, do not switch from using Hertz or Avis, but instead from using public transportation, a taxi, or maybe borrowing a friend’s car.) Product managers need to identify what the potential barriers to adopting their product could be and how to overcome these obstacles. These can be built in to the product or service itself to not only remove objections but actually provide additional competitive differentiators. For example:

• A customer relationship management (CRM) application provider could offer data setup for free to all customers who sign up for an initial contract term to ensure that conversion costs are not a barrier to adoption. To provide additional benefit, they could offer to “clean” the data while converting it, providing an additional service and benefit to customers.
• For a product with a learning curve, certain elements like an online demo and customer testimonials on the product’s ease of use could address customer fears about learning cost. Discussion forums, free online training, and implementation guides could help support users after adoption as well.
• A bank attempting to lure customers to a new checking account offering could offer a checklist of automatic payments the customer needs to consider changing. Better yet, the bank could offer contact information for the most common payees, forms for the customer to provide to their payroll department to change direct deposit settings, or even provide personal assistance in setting up automatic bill payments on the new account.

Successful product management is not just about having a “better” product — it is about understanding what it will take for a customer to adopt the product. By understanding the explicit and implicit reasons for a customer to resist switching, product managers can better design their offerings to allow a larger number of people to actually adopt them.