Switching costs: types, examples and how to lower them
Switching costs are what a customer gives up to change supplier. The three types, real examples, and how to lower them to win a rival's customers over.
Switching costs are everything a customer has to pay, do or give up to move from one supplier to another: money, time, effort, risk and relationships. The higher a customer's switching costs, the better a rival's offer has to be before they move.
Michael Porter defines them as "fixed costs that buyers face when they change suppliers" and counts them among the main barriers to entry. His example is enterprise software: once a company has installed SAP, he writes, "the costs of moving to a new vendor are astronomical", because of embedded data, processes built around the system and retraining.
The three types of switching costs
The most cited classification comes from Burnham, Frels and Mahajan's 2003 study in the Journal of the Academy of Marketing Science, which groups eight specific costs into three types.
| Type | What the customer loses | Example |
|---|---|---|
| Procedural | Time and effort: evaluating options, learning the new product, setting it up, and the risk it goes wrong | Re-entering two years of client records into new software |
| Financial | Money and benefits: exit fees, lost loyalty status or discounts, paying twice during an overlap | A frequent flyer giving up their airline status |
| Relational | People and identity: the relationship with a familiar contact, attachment to a brand | Leaving the hairdresser who knows exactly how you like it |
Procedural costs are the most underrated. They never appear on a price list, and they are why "we've been meaning to switch" can last for years.
Switching costs examples
Enterprise software. Porter's SAP case: data, processes and training all tied to one system.
UK bank accounts. Moving salary payments and direct debits used to take 18 to 30 working days, according to MoneySavingExpert. The Current Account Switch Service, launched on 16 September 2013, cut that to seven working days and moves the payments for you. Lowering a procedural cost was the whole point.
Accountants and agencies. Mostly relational and procedural. The client knows the work is fine, does not want to explain their business from scratch, and dreads a handover going wrong.
Phone contracts, gyms and annual software plans. Mostly financial: the early termination fee, or months already paid for.
Marketplaces and messaging apps. Leaving means leaving the people there, a cost no feature can offset.
How to lower a competitor's customers' switching costs
If you are the challenger, a better product is rarely enough. The customer weighs your advantage against the cost of moving, and the cost usually wins. So attack the cost, type by type.
Procedural: do the move for them. Offer a free migration or import, set the account up before they commit, and mirror the structure they are used to so there is less to learn. "We'll move your data and you'll be live by Friday" beats any feature list.
Financial: absorb the exit cost. Credit the months left on their current contract, match their loyalty status, or hold their current price for a year. Compare the cost with what you pay to acquire a customer through ads; if the buyout is cheaper, it is the better marketing spend.
Relational: replace the relationship. Introduce the named person they will deal with before they sign, and offer a reference from someone who made the same move.
Risk: make reversal easy. Monthly terms, a guarantee, or a trial that runs alongside the old supplier reduce the fear that the move goes wrong.
Evaluation: publish an honest comparison. A page comparing you with a named rival, including where they are better, answers the research question the customer would otherwise have to do themselves. A one page battlecard does the same job for your sales team.
To find which costs matter most, read your rivals' negative reviews for words like "stuck", "contract", "cancel" and "export". Those are the switching costs their customers resent, and they tell you exactly what to offer. Finding positioning in competitors' reviews covers the method.
Common mistakes
Thinking only of exit fees. Financial costs are the easiest to see and often the smallest. Effort and risk stop more switches.
Mistaking trapped customers for loyal ones. Customers held by friction rather than value leave in bulk the moment someone removes the friction, whether that is a rival or a regulator.
Raising your own switching costs with friction. Hidden cancel buttons and surprise exit fees work until they become the story in your reviews. Low switching costs are also a source of buyer power, so the instinct to raise them is right; the method matters. Raise them with value: history, integrations and service that would be painful to lose. That is the kind that becomes a real competitive moat.
Questions people ask
Are high switching costs good for a business?
For keeping customers, yes. When you are the challenger, the same costs work against you. And customers who stay only because leaving is painful tend to go the moment a rival makes it easy.
What is the difference between switching costs and sunk costs?
Sunk costs are money already spent that cannot be recovered and, in principle, should not affect the decision. Switching costs are new costs created by the act of moving, so they rightly do affect it.
What is a network effect switching cost?
When a product is more valuable because other people use it, leaving means losing access to those people. That is why messaging apps and marketplaces are hard to leave even when a better product exists.
Can regulation lower switching costs?
Yes, and it often does. In the UK, mobile customers can text PAC to 65075 to get a switching code, and Ofcom requires the new provider to complete the move within one working day.
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