Making the switch

If you have ever moved your banking business you will have experienced penalties, stress, frustration, endless paperwork and the pain of setting up all your direct debits all over again. This is a classic example of a competitive advantage called ‘switching cost’, something we are all too familiar with but often neglect to apply to our own business.

Switching costs refer to the time, costs, delays, frustrations, stress and disruption associated with moving from one supplier to the next. Sometimes it is just a termination penalty but it could be a wholesale revamp of your business. Imagine what is involved in moving yourself off an SAP platform to install an Oracle enterprise wide application system. You are seriously talking about millions of dollars and several months if not years of disruption. You have to retrain your staff, redesign internal systems and export and then import all the historical data. No small task. A classic case of high switching cost.

What we want in business is for the competitors’ customers to move easily to us but for ours to think hard before they move away. Usually, similar switching costs apply to all the firms within a sector, but there is nothing to stop you building some additional ones. You just need to be a little creative. Think carefully about all the elements of switching. Remember it is not just cost, it is also time, disruption and, sometimes, friendships.

To be really effective in this element of competitive advantage, you have to embed yourself in your customer’s business. How integrated are you to their operations? How entangled is their business with yours? To what extent are you a partner to them rather than just a supplier? How much do they depend on you for supplies but also advice, help, and even social intercourse? How many of your staff interact with members of the customer’s organisation? How much do you know about their business and how well do you integrate that information in the way you work with them?

At a very simple level, we stick with what we know and what works for us because of the time and trouble it takes to evaluate the alternatives. If something works, we prefer to leave well enough alone. The flip side is the risk that we take when we switch to something new. What if we make the wrong decision? What if we end up losing our preferred position where we are currently? You need to make both of these attributes of switching cost work for you. Increase the time, cost and so on of switching but at the same time, make it easy and comfortable for the customer to deal with you right now.

In many ways your customer is yours to keep if you do a good quality job and satisfy their needs. Don’t give them a reason to go looking for an alternative but ensure that when they do, they need to think carefully about the switching costs of doing so.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.