Switching cost
In life and business
‘‘I’ll have your software removed from my company’’, snapped the procurement manager of a consumer tech startup when his unrealistic demand was politely turned down citing profitability concerns. Deep down, he knew it was an empty threat because even if you could move to another software overnight, there is a huge switching cost which has several elements and this switching cost can sometimes outweigh the cost of the software itself.
Similarly, in personal life there is always a switching cost of moving cities, changing your family doctor & switching to a new telecom provider. We often discount how easy it is to hop on a new platform but how challenging it would be to bring in the learning curve and get used to the new platform. People switch because of one strong reason or a mix of multiple reasons and its important to understand the underlying motivation to double down on these reasons.
Almost always, we make purchases based on emotions and later justify it with logic. Something similar happens when we need to switch a vendor or a service provider. Before 2 years, we shifted from Bangalore to Mumbai (not a very common move these days) mainly because it stuck an emotional chord - we just never felt at home in Bangalore whereas each time we’d visit Bombay - we would get this warm fuzzy feeling. Now in order to make this change, we had to justify with logic otherwise it would be a blot on human intelligence. Since my parents live in Rajkot which is a 45 mins flight or an overnight train journey, I could easily justify this move with the idea that we’d be visiting Rajkot more often and thereby get a chance to spend more time with the family. Guilty as charged, we’ve not been able to visit as often as we thought we’d be visiting but nevertheless it helped us reduce the friction of making the switch with strong arguments listed neatly in our excel sheet of pros and cons. In hindsight, this has been a great decision without getting into a debate on which is a better city because to be honest, none of them are even close to having the infrastructure that an aspiring nation like India should have but let’s reserve that discussion for some other day.
A more recent example would be switching my telecom provider. Last week (Sept 2023), I switched to Reliance Jio after getting frustrated with the fact that Vodafone is going to take a lifetime in order to provide 5G services. Unfortunately, there is no ‘‘test drive’’ when it comes to telecom providers so I took the plunge to put an end to my 18 year old relationship with Vodafone (fka Hutch & Orange) and the FOMO of not having access to 5G services. Guess what, I do get 5G but I get it only when I get network. Well played, Reliance Jio. Even when I passed from Antilla, I could see Mukesh Ambani’s smirk on my mobile screen along with 2 out of 4 bars of mobile signal. I’m sure Mr Ambani is probably using Vodafone in his own house. This is a classic case of switching for peripheral benefits while compromising on the core benefits. The core benefit being availability of signal and the peripheral being 5G speed. In hindsight, I was doing just well with 4G speeds because I’m neither a content creator nor a content consumer, just someone who loves bookmarking interesting articles to never read them in this lifetime. As per TRAI rules, I can only port back to Vodafone after 90 days. Basically, they want me to suffer for switching to a new provider without doing my due diligence - fair enough TRAI, I’ve learnt my lesson!
If you want to understand how hard switching costs can be for businesses, MCX and 63Moon’s relationship is one of the finest recent examples. MCX has been using the core trading platform provided by 63 moons and has not been able to work with its technical partner TCS to build an alternative platform in order to make this switch. Only time will tell on who will have the las laugh but for now, MCX is definitely reeling under pressure where on one side, they continue to get bullied by 63Moons in shelling out 125 crores a quarter & on other side, they keep getting long bills from TCS who has been unsuccessfully trying to build a trading platform since several quarters.
If you’re a business who is planning to make a significant switch to a new technology or a vendor - you might have your decision making framework ready but attributing intangible and tangible switching costs early on can really help you create a clear picture of what you’re getting into.
If you’re a business who is planning to grab someone’s lunch by getting your prospect switch to your platform or service - you might want to showcase how easy this ride is going to be and more importantly who quickly they could realise value without your product becoming shelf-ware.
Switching is easy, deriving and delivering value is hard.
I’ve purposely skipped 2X2 table on switching cost vs derived benefits just in case if you’re wondering.