Minimize switching costs to maximize value

If you want to be a bad product manager, build the “best” product and assume that the customers will come. That’s all that matters to customers, right? Sure, it might seem like a bit of a hassle at first to switch over, but once people will realize how great your product is, they won’t mind at all.

If you want to be a good product manager, understand relevant switching costs and attempt to reduce them as much as possible to improve customer acquisition and perceived value. Every product has a cost, whether implicit or explicit. Even “free” products have a cost, most notably the time a consumer spends learning and using it. People will buy and use products where the value and benefit they get from the product is higher than the cost to them.

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In most cases, the main cost is explicit — the price of the product to purchase. However, in many cases, the cost to someone is beyond just what they have to spend and takes into account other factors. These switching costs take multiple different forms:

  • Learning cost: A new product might have improved functionality or capability which requires an investment of time and training to take advantage of. Switching from a car automatic to manual transmission may require the driver to learn how to drive a stick-shift. Switching from Windows to OS X may offer some benefits, though there is initially some loss of efficiency at a minimum for even the most experienced computer users. For a computer programmer, coding in a new programming language may offer many benefits, though it will require time to learn the language and potentially cost to purchase resources and training in order to become knowledgeable about the new language.
  • Opportunity cost: In some cases, consumers have to deal with mutually exclusive product offerings, and choosing a new one which provides benefits may require losing some benefits their current offering provides. A hospital choosing an electronic medical record system on which to standardize will select the option which best meets their needs, though invariably there will be features and benefits of other systems of which they will miss out. A long-time elite member of one airline’s frequent flyer program considering a switch to another airline as their primary carrier will invariably get some additional benefits with the new program, though will likely have to give up perks of their previous program.
  • Implementation cost: The cost of getting to the point where a product can be actually used is often higher than the cost of the product itself and is often a huge consideration in enterprise environments. Installing a new ecommerce system may offer significant improvements for an online retailer, though there will likely be costs in adapting that system to billing, fulfillment, customer service, and related technologies within the organization. Solar roof panels may be an improved option for a homeowner looking to reduce energy costs, but there are significant costs in not only installing the panels themselves but wiring the home’s electrical system to take advantage of the new technology.
  • Conversion cost: For some products, data or settings need to be converted from the old to the new product. Switching to a new contact management system involves proper transition of the data from the old to new application to ensure no data is lost or rearranged. Anyone who has avoided upgrading an aging computer knows the cost (in time, and often in money) to convert data and settings to the new version.

Decisions to stick with a current (and often inferior) product rather than switch or upgrade can also be attributed to these more psychological or behavioral reasons:

  • Inertia: People in general stick with what makes them comfortable. They use products that have worked well for them, and do things a certain way because they have always done things a certain way. (“My mother always used this brand of pasta sauce, and her mother always used this brand of pasta sauce…”)
  • Fear of change: Rather than looking at the benefits of a change, people may look at only the things which can go wrong. (“What if the new detergent doesn’t clean as well as the old one? What if my cell phone number doesn’t get switched properly to my new carrier and I’m without a phone for several days?”)
  • Overestimation of the difficulty of the change: Some changes can seem more daunting than they actually are. If consumers do not have a clear picture of what the change requires, they may resist. (“I’d like to switch to a new bank account with higher interest rates, though I can’t bear to think of the hassle of changing my direct deposit setup and automatic bill payments.”)

Switching costs are relevant for most products in some form. Even with totally new and groundbreaking products, consumers are switching from some other prior option, even if not a direct competitor. (Consumers using ZipCar for the first time, for example, do not switch from using Hertz or Avis, but instead from using public transportation, a taxi, or maybe borrowing a friend’s car.) Product managers need to identify what the potential barriers to adopting their product could be and how to overcome these obstacles. These can be built in to the product or service itself to not only remove objections but actually provide additional competitive differentiators. For example:

  • A customer relationship management (CRM) application provider could offer data setup for free to all customers who sign up for an initial contract term to ensure that conversion costs are not a barrier to adoption. To provide additional benefit, they could offer to “clean” the data while converting it, providing an additional service and benefit to customers.
  • For a product with a learning curve, certain elements like an online demo and customer testimonials on the product’s ease of use could address customer fears about learning cost. Discussion forums, free online training, and implementation guides could help support users after adoption as well.
  • A bank attempting to lure customers to a new checking account offering could offer a checklist of automatic payments the customer needs to consider changing. Better yet, the bank could offer contact information for the most common payees, forms for the customer to provide to their payroll department to change direct deposit settings, or even provide personal assistance in setting up automatic bill payments on the new account.

Successful product management is not just about having a “better” product — it is about understanding what it will take for a customer to adopt the product. By understanding the explicit and implicit reasons for a customer to resist switching, product managers can better design their offerings to allow a larger number of people to actually adopt them.

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17 thoughts on “Minimize switching costs to maximize value

  1. Brilliant! Thanks.

    Gives me an idea to incorporate in my presentations and websites.

    “Product managers need to identify what the potential barriers to adopting their product could be and how to overcome these obstacles. ”

    Thanks again.

  2. Jeff – Nice, comprehensive coverage of switching costs.

    I especially like your CRM example.

    From my recent experience, the local car dealership has this down pat. When I traded in my old car for a new car, they took care of everything: insurance, registration, moving the audio system, etc. Switching was a breeze for me.

    On the flip side, many companies intentionally build high switching costs to prevent their customers from switching to a different company. I think Apple is very good at this! 🙂

    – Raj
    Accompa – Proven Software Tool for PM Teams

  3. @raj On the flip site, Google actually goes to great lengths to REDUCE the hassle of moving to a competing product. They vow to not lock up your user data and to make it easy to export in the event you want to switch to another service. This may seem counterintuitive, but in the user’s eyes, they have less resistance to using Google in the first place because they know it would be easy to leave. However, they usually stay because Google builds great user-centric products.

  4. Thanks, invaluable article. Many experienced folks have told me one thing, a good product manager is a good listener, that’s the “how” part to identify obstacles, i’ll find out soon enough!

  5. I am working on the project on PM.Can any one tell me what are the trainings and certifications that exist in PM?

  6. Dear Lash,
    I have learnt lots of knowledge about product manage.Thank you very much for your sharing idea.

  7. Thanks for the lesson. This was not only interesting but clear and informative. It gives a novice like me good understanding that I can see how I can use it the info. Thanks again.

  8. Jeff,
    A wonderful post and I liked the behavioral part and the later part on ‘smoothening the rough edges” in order to make “the switch” more acceptable to the customer.

    Actually the 3 reasons you quoted for the behavioral part especially the last one is at times the biggest spoiler . In fact it is used in a rather unproductive manner to roadblock change into a system where “certain elements” on the various customer teams fear a reduction in their so-called powers of “future influence” in the new system.

    I guess when the prize we seek is customer acceptance of product and “winning the deal” ,then we cannot afford to ignore these nay-sayers and lose sight of these folks bent on spoiling the game.

    So then how should product presentations be tailored to blunt this resistance hindering the overall march towards the switch?

    Obviously a confrontationist blunting is out of the question but in order to accomodate such elements how far should the tools of compromise be exercised?

  9. I need some more insight on being a aProduct Manager, I have been assigned as one and am completly Clueless, I feel like i was thrown in the ocean and expected to swim , Please post or send me more info.

  10. Brilliant Jeff ! One of the ways of achieving the easy transition and addressing learning curve is smart use of help within application. Not only that the application should include standard process which are intutive for customers . But as many product managers would find it is very diffuclt to convince the technical team to develop /. incorporate the features.. Somehow development team always feel they are developing products for them selves and not for users to use.. Its really frustrating .. Your post is a true reflection of how simple things are to be a suceesful product

  11. Good stuff. Can anyone elaborate on the CRM bit and what is possible in terms of migrating user information?

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