What are switching costs?

The cost of switching is the cost of changing the costs when suppliers change. The customer could be a consumer or an enterprise that receives parts or services from another business. Costs may include direct financial costs and more general costs such as time. Switching costs are significant because they may mean that the company can have higher costs than an opponent without necessarily losing business.

The most visible switching costs are financial. They usually come in the form of penalties for termination of the contract. A common example is customers of mobile phones who have received a subsidy from a selected network when buying a phone and in return they have to pay the departure fee before the minimum contract period is completed.

There are also practical costs that can be transferred to cash. This could include the time it takes to create a new agreement and spend the time to manage suppliers. This time it can be transferred to financial costs on the basis of employees incurred by spolEquity when switching. Some switching costs are harder to quantify because they are based on emotions. This includes the way many customers follow the philosophy of the "better devil you know" when choosing a supplier. It is also argued that inertia and laziness can contribute to switching costs, because people often do not bother to switch to a new supplier, even if they know they would save money.

Re -switch costs play an important role in economics. They help to undermine one of the most basic principles of the market economy: that if two suppliers offer the same goods or services, customers always choose a cheaper option. Theoretically, switching costs could even be built into the company's decision, which means that the company can keep prices over their opponents because they know that they will still retain the customer. In practice there are difficulties in quantification of all switchesACEG costs that companies will make by judgment or attempt and mistake than by precise calculation.

The concept of switching costs plays an important role in the theory developed by economist Michael Porter. They claim that five forces determine how competitive the specific market is: the availability of close alternatives to the market of the market, the probability that new companies will enter the market, consumers' negotiating power, the negotiating power of suppliers and its own competitiveness of companies on the market. Switching costs play a certain role in all except the latter of these forces.