Switching Cost

Switching costs can be financial, such as cancellation fees or the cost of buying new equipment; practical, such as the time needed to learn a new system or move data; or psychological, such as the uncertainty of trying something unfamiliar.

For example, a company that has used the same accounting software for ten years would face significant switching costs to change systems: moving years of data, retraining staff and adjusting processes. Even if a rival product were slightly cheaper, the company might stay with its current provider.

High switching costs benefit businesses because they make customers less likely to leave, which supports steady revenue and pricing power. They are one of the sources of a durable competitive advantage, sometimes called an economic moat.

Banks, mobile phone networks, enterprise software and specialised equipment suppliers often benefit from switching costs. Customers and regulators may see very high switching costs as a problem, because they can reduce competition. Some rules, such as number portability for mobile phones or current account switching services, are designed to make switching easier.