Switching barriers

Switching barriers or switching costs are terms used in microeconomics, strategic management, and marketing to describe any impediment to a customer's changing of suppliers (customer switching).

The definition of switching costs is quite broad. Thompson and Cats-Baril (2002) defines switching costs as "the costs associated with switching supplier", while Farrell and Klemperer (2007) write that "a consumer faces a switching cost between sellers when an investment specific to his current seller must be duplicated for a new seller". As these definitions indicate, switching costs can arise for several reasons.

Examples of switching costs include the effort needed to inform friends and relatives about a new telephone number after an operator switch; costs related to learning how to use the interface of a new mobile phone from a different brand; and costs in terms of time lost due to the paperwork necessary when switching to a new electricity provider.

Types of switching costs include exit fees, search costs, learning costs, cognitive effort, emotional costs, equipment costs, installation and start-up costs, financial risk, psychological risk, and social risk. In the marketing literature, customers face three types of switching costs: (1) financial switching costs (e.g., fees to break contract, lost reward points); (2) procedural switching costs (time, effort, and uncertainty in locating, adopting, and using a new brand/provider); and (3) relational switching costs (personal relationships and identification with brand and employees).

Some of these costs are easy to estimate. Exit fees include contractual obligations that must be paid to the current supplier and compensatory damages that may be awarded for breach of contract. Often, vendors combine sign-up incentives with penalties for early cancellation. Careful buyers who read the fine print should not be surprised by exit fees. Search costs and learning costs, the effort and expense required to find an alternative supplier and learn how to use the new product, are also usually expected.

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