Yes, personal relationships have a lot to do with customer loyalty, but the ties that bind aren't indestructible. One way to sever those ties is to eliminate the cost of changing vendors. "Switching costs" are those one-time expenses incurred when a customer stops using your competitor's product or service and starts using yours. Considerable time, energy, and even money are expended in the transition.
Switching costs were a key element in the videocassette-recorder battle between VHS and Beta. If you bought Beta technology and tapes, converting to VHS required a major purchase to do the same thing you could already do. Before VHS could achieve victory in the VCR war, the usefulness of its equipment had to greatly diminish the value of owning a Beta machine.
In addition to the outlay for new equipment, time and energy must also be invested. If you convert to new word-processing or spreadsheet software, you must not only buy the program but learn to use it and transfer your existing data to the new format. If your competitors' customers start doing business with you, they have to "convert" to your system -- become familiar with how you do business, learn how applications and orders are processed, enter your company in their databases, find out whom to talk to about what, and possibly discover when they drop by with a dozen donuts that your entire staff is on a low-fat diet.
Making the switch: Three temptations.
If you want someone to leave the competition and buy your product, you have to reduce or eliminate the switching costs. You can do that by:
Giving away the product or offering an inexpensive upgrade.
Software companies routinely offer freeware or 30-day demos -- programs you can try without paying a dime. You can hardly open your mailbox or newspaper without finding an America Online trial-membership CD. How can your company adapt this strategy to minimize the financial burden of switching to your product or service?
Duplicating the customer interface.
The more your product or service works JUST LIKE the competitor's, at least on the surface, the easier it will be for the customer to learn. Ever notice how software programs in a given product category seem so similar in appearance and operation? Of course, the added value of the new product should be evident, but too great a difference might intimidate customers. A similar approach could lure customers to your product or service. How can you imitate your competitors' customer interface? How can you eliminate the learning curve that keeps customers at bay? Think of ways to make it as natural for customers to do business with you as with your competitor.
Subsidizing the transition.
Some companies provide free training to customers, others offer trade-in allowances. Beta owners might have converted much earlier if they could have traded in their tape libraries for the VHS equivalent. What must customers expend to switch to your product or service, and how can you reduce their transition costs?
Maybe you don't have love, karma, or clever wiles on your side, but customers will beat a path to your door if you pave the road, pay the toll, and open the gate.
Once you've tempted them, just be sure your product is worth the switch.
Recommended reading: On Competition, by Michael Porter, 1998, Harvard Business School Press. A collection of 15 articles by Porter on everything from switching costs to international competition.
