Switching costs refer to the price for customers of moving from one vendor or service to another. Often the cost and trouble of such changes are prohibitively high, something providers rely upon to keep customers. Though generally applied at the enterprise level, switching costs can prove just as valid for retail consumers, especially as individuals come to rely increasingly on technology and web-based services.
Q. Now, historically this meant keeping you customers because they would have to spend a lot of money to change vendors, right?
A. Yes. An enterprise that was using one database system would have to spend a fortune to rip it out and install another, so the “switching cost” was high. But Apple and, say, Facebook, show how the concept applies in other ways, and is a very powerful competitive tool… without any dollars involved.
Q. So the point is just that its too much trouble to switch at some point…
A. Right. This is an obvious, I guess, but hardware analysts miss it all the time. The phone wars are not really feature wars, at least if the offerings are generally in the same zone. You’re not going to switch away from all the interoperability of your Apple devices, and all their applications, just because the Android includes, say, an camera with slightly better resolution. And as more and more of your storage moves to the cloud, and the devices are gateways to that data, it becomes more true.
Q. So is this one reason Zukerberg said yesterday that there’s going to be no Facebook phone?
A. Yes, I think he sees what he’d be up against there; the phone itself is just one piece of a much bigger puzzle. But this also shows you why, in my opinion, MSFT is still in the hunt. From an enterprise pov, they still are the big dogs; their software dominates and now they’ve added some powerful cloud services. So those switching costs are very high– if they can build the right software/phone system with Nokia, and it looks like they can, they still have a good shot in the mobile space.
You can’t just look at it from the point of view of the phone itself.
Q. And what does this say to other companies?
A. Switching costs are one of the last true barriers to entry you can erect. Geography, supplier access, costs… these have all disappeared. Nor is IP generally effective, really. You see the problem with Groupon– no switching costs. Actual dollar costs aside, interoperability (Apple) and network effect (Facebook) have become the big weapons.