What Are Switching Costs?

Switching costs refer to the costs incurred when customers switch from purchasing one supplier's products to purchasing another supplier's products, such as adding new equipment, redesigning products, adjusting testing tools, and retraining users. ^[1]

Conversion cost

If companies want to increase customer conversion costs, they should first consider what losses they will have in terms of process, financial and emotional aspects if their customers switch to competitors. Then increase the customer's conversion cost to increase the difficulty and cost of customer conversion. Some companies promote the particularity of products and services to make customers realize that their conversion costs are high. For example, a company can advertise to customers the complexity and long learning curve of its products and services, making them feel that the cost of program conversion is high, and they are reluctant to change service providers easily. Similarly, by promoting the particularity and irreplaceability of the company itself, it provides consumers with a complete set of different functional products and services to increase their dependence on them and effectively resist the temptation of other corporate loyalty programs.

Providing consumers with more humanized and customized products and establishing a one-to-one relationship with customers at the emotional level will also greatly increase the cost of consumers' procedures and emotions. Such as

Conversion cost effect definition

Most scholars agree

"Conversion Cost" was first proposed by Mike Porter in 1980, and refers to the one-time cost incurred when consumers change from one supplier of a product or service to another. This kind of cost is not only economic, but also time, energy, and emotion. It is an important factor that constitutes the competition barriers of enterprises. If customers switch from one business to another, they may lose a lot of time, energy, money and relationships, and even if they are not completely satisfied with the service of the business, they will think twice. Measures To increase the conversion cost of customers, companies should first consider what losses they will have in terms of process, financial and emotional aspects if they switch to competitors. Then increase the customer's conversion cost to increase the difficulty and cost of customer conversion. Some companies promote the particularity of products and services to make customers realize that their conversion costs are high. For example, a company can advertise to customers the complexity and long learning curve of its products and services, making them feel that the cost of program conversion is high, and they are reluctant to change service providers easily. Similarly, by promoting the uniqueness and irreplaceability of the enterprise itself, it provides consumers with a complete set of different functional products and services to increase customer dependence on them and effectively resist the temptation of other corporate loyalty programs. Providing consumers with more humanized and customized products and establishing a one-to-one relationship with customers at the emotional level will also greatly increase the cost of consumers' procedures and emotions. For example, if Citibank prints customer photos on a credit card, MCI World Communications provides consumers with a direct-dial home phone system for family members. With this call system, family members can spend very little. At present, many pioneers of loyalty programs such as hotels and airlines have shifted the focus of loyalty marketing from increasing the cost of procedures and financial conversions to increasing the cost of emotional conversions, because the cost of emotional conversions is more than the cost of procedures and financial conversion , More difficult to be imitated by competitors. Conversion cost effect Definition of conversion cost effect means that the greater the investment required to change suppliers, the lower the price sensitivity of consumers to the goods of existing suppliers. In other words, the greater the additional cost of changing suppliers, the lower the consumer's price sensitivity to goods. This is because many commodities require a series of matching investments by consumers to ensure their use. For example, airlines are generally reluctant to change aircraft suppliers, because if Boeing is replaced with Airbus, retraining mechanics and investing in new spare parts will increase costs. Example analysis of switching cost effects Of course, the loyalty associated with switching costs is not constant. When the supporting investment environment changes, consumer price sensitivity will increase. For example, in the era of e-commerce, those companies that still rely solely on traditional channels for sales may gradually lose their advantages, while those who combine traditional channels with e-commerce channels have achieved rapid development. In order to reduce the negative impact of conversion cost effects on enterprises, companies can incentivize consumers' purchasing behavior by absorbing or reducing conversion costs. For example: give customers more discounts or provide higher value-added services. When conversion costs are effectively reduced, companies can compete with alternative products on the market.