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Fairplace Group

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Mark Panerio
Mark Panerio

Switching Costs For Buyers


Switching costs commonly refer to the financial costs incurred by a consumer when they switch brands, products, services, or suppliers. However, it is important to note such costs also include non-financial costs. Other costs include psychological, time, and effort-based costs.

Recall the example above regarding an individual switching to a cheaper phone plan. If the individual needs to exert significant effort and time into switching to the cheaper phone plan, the individual may not choose to switch phone plans to save $5.

However, it is important to note that although companies can create high switching costs, competitors can help consumers alleviate such high costs by bearing a portion of those costs. For example, a company can impose a high cancellation fee for their services, but a competitor can offer to pay the cancellation fee for the consumer if the latter agrees to switch over.

A notable example of a product with high switching costs is the QWERTY keyboard layout. According to studies, the QWERTY keyboard layout may not be the most efficient keyboard (in terms of typing speed) compared to a DVORAK keyboard layout.

The DVORAK keyboard layout is not popular with consumers, due to the high switching costs associated (in terms of the time and effort required to learn a new keyboard layout) with transitioning from a QWERTY keyboard to a DVORAK keyboard.

As the markets continue to consolidate at all levels of the food and agribusiness chain, the seller-buyer relationship increasingly looks and behaves like a business-to-business (B2B) market. In these consolidated markets, suppliers and customers alike are making more substantial specific asset investments that link their businesses more closely and the purchasing process is becoming more complicated. The pursuit of enhanced relationships between business partners in this B2B market is likely more critical than in a more fragmented market that behaves a bit more like a business-to-consumer market. The literature on B2B relationship marketing recognizes the importance of customer perceived value, customer satisfaction, and trust as critically important elements of establishing a strong business relationship. This research paper expands on this literature to look at the importance of switching costs in enhancing the B2B relationship.

To identify the critical dimensions of switching costs in a B2B setting, the researchers interviewed 38 customers who had recently switched service providers. They focused their interviews on the person in each company that had central responsibility for the switching decision. Through this set of highly structured interviews they identified three critical dimensions of switching costs: procedural, financial and relational.

Procedural switching costs are the costs associated with finding a new supplier. These costs include uncertainty costs, search and evaluation costs, costs of learning, and setup costs. Often, customers associate switching with the risk and uncertainty of potential negative outcomes from the switch. The more uncertain they are about the relative performance of the current and new supplier offerings, the higher their perceived switching costs (e.g., corn seed performance). Customers also see the time commitment to identify and evaluate new suppliers as costly. Often, switching suppliers might require the customer to develop new skills/expertise to effectively use the new product or service (e.g., financial accounting software). And finally, some customers see the time and effort required to relay their needs and information to a new supplier as costly.

In addition, the study reinforced the importance of strong brands, even in a B2B setting. Strong brands often embody the key elements of customer-perceived value and trust. The insight from this study is that the establishment of these strong brands can also enhance the perceived switching costs for the buyer as they tend to associate their own business with brand. I would a


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