Learning about Types of Customer Switching Costs

It can take some time for a new customer to become a profitable one for the new supplier. At the same time, switching costs make it an expensive endeavor for customers to choose a new supplier. To help us understand the issue, let's consider three types of Switching Costs that exist:

Direct Switching Costs
These are the immediate costs for customers when they switch suppliers. There are costs incurred during the search for new suppliers, mostly in the form of time. There is often a contract penalty for early termination. Finally, there is the risk that the new supplier is not the reliable replacement that they appear to be.

Relationship Related Switching Costs
These are the costs incurred through the interactions with the new supplier. These "learning costs" are often underestimated when a customer entertains the switch. A new supplier often requires the customer to expand their comfort zone, and not many customers are thrilled to do that.

Other relationship-related switching costs take the form of loyalty programs or accumulated quantity discounts that can simply evaporate.

New supplier? Sure, but you're starting over in a lot of areas. Finally, since people buy from people they like, there are psychological costs when the customer's contacts have changed.

Product Related Switching Costs
These are the costs associated with working with a new product. There are training costs, valuable time, and an almost certain drop in productivity during the initial phase of the new product implementation. A new product often necessitates that there are complementary products that also must be replaced.

Another significant, yet underappreciated cost in this category is the cumulative cost that the customer's customer (in the scenario where the initial customer is a reseller) incurs. If the end-user is being provided with a new product because their supplier, as the middle man, has switched, then the end-user is confronted with a sometimes unwelcomed product change.