switching costs Emphatic

Switching costs: friend or foe in your marketing plan?

“We’ll buy out your contract,” declares the voice over the techno-music playing, Millennial-happy TV ad that’s making me regret not using my DVR. The small print at the bottom of the screen shows the dollar figure the company’s willing to pony up to your current cell network so you can escape your contract: $350, paid directly to your old carrier. No cheap goodbyes in voice-and-data land, apparently.

That a departing customer must pay such a hefty fee in the first place might be one of the reasons why telecoms companies seem so unloved today. Consumers are more accustomed to being able to come and go as they please, picking up this new brand and discarding that as their means, likes and dislikes change. Being locked into a long-term contract and then being penalized for ending it — it’s not exactly the stuff that customer satisfaction is made of.

B2B customers, on the other hand, are quite used to taking switching costs into account when it comes to buying hardware, software and the like. And they realize that switching costs are not always as obvious as having to write an escape check. Paul Klemperer, an economics professor at Oxford University, explains how they can come in many forms:

A switching cost results from a consumer’s desire for compatibility between his current purchase and a previous investment. That investment might be a physical investment in (a) equipment or in (b) setting up a relationship, an informational investment in finding out (c) how to use a product or (d) about its characteristics, (e) an artificially-created investment in buying a high-priced first unit that then allows one to buy subsequent units more cheaply, or even (f) a psychological investment.

In the past, supplying businesses with hardware or software could be a pretty lucrative gig. There was the outlay for the product itself, and then all associated training and consulting the customer would have to pay for in order to actually make the product work. And then, having once invested in all of it being locked in to keep investing in it because it would be costly to change horses mid-stream? Pretty lucrative, that old playbook. That is, until the nexus of cheaper microprocessors, cheap venture capital money, and the emergence of the cloud — plus a host of other factors — took that old playbook, set fire to it and then shot the ashes into outer space.

Competition from upstart providers and well-funded SaaS-ers operating in the cloud mean that switching costs in the B2B world are under pressure as never before. This is fantastic news if you are on the buying end. Also good if you are on the selling end and trying to make inroads. But if you are the incumbent supplier? Less good. Like a corporate Game of Thrones you may now find yourself battling the same forces propelled you to the winner’s seat in the first place. But whether you are the incumbent or challenger, Klemperer’s words may point you towards a strategy.

Incumbent? Increase the emotional and relational switching costs.

What are all the ways you can make yourself lovable to your customer and thus avoid being dumped? This requires more than customer service, which tends to be reactionary, and is more akin to “customer anticipation”, also known as “customer mind-reading” or by its street name, “customer blow-your-socks-off-and-leave-you-begging-for-more”. Fancy stuff like segmentation, developing personae and running cohort analyses can help here. Less fancy stuff like picking up the phone, sending a well-considered e-mail, or reaching out to them on social media may, as well.

Challenger? Decrease the informational switching costs.

What are some ways you can convince the customer that switching over to your superior product/service is really not such a difficult thing to do? Or conceding that, okay, it might be inconvenient but that it’ll be one-hundred percent worth it in the end? Content marketing can play a huge role here. In addition to general posts about how fantastic your product is, consider blog posts that offer a “switching strategy”, i.e. very specific advice about how and under what circumstances a customer should switch from Leading Product to Your Product. (There may be some SEO benefits to doing this; “X vs. Y” is a commonly used search query.) And, of course, be sure to promote those blog posts far and wide with the help of social media.