Build In Switching Costs
17 Jan 2012
Let’s say that you have come up with a game-changing product concept or service offering, and you’ve done a little market research and validated that the market demand exists and profit margins are healthy – fantastic! But think ahead! There will be a day in the not-too-distant future when competition begins to mount against you and begin to eat into your margins. The question you’ll begin to ask at that point is – what can we do to minimize loss of market share. So you begin looking at barriers to entry (sunk costs, entrenchment, brand recogntion, etc). But equally important is the switching cost of your customer.
When designing your product, look for opportunities to get them invested in your product, so that its simply too painful for them to consider leaving when the competition arrives. This is something nicely built in to Facebook for example. As a social networking site they’re a mere commodity really. Their real value is (a) the fact that everyone I know is now on Facebook and (b) that I have connected with nearly everyone I’ve ever known and can reach them at any time. In some ways, it has become my personal CRM system in that way. As much as I get annoyed with their constant changing of their user interface from one unusable feature to another, what am I going to do about it – invest hundreds of hours replacing them?
As a result, it really doesn’t matter what their competition does, how they compete or differentiate their products. The switching costs are just too high for me and I likely won’t leave until a critical mass of my friends have also left. Consider this as you build your product. Try to bake addictive and free features into the cake, so to speak, so that your customers also become invested in your product and the switching costs just become too high.
Technologist living in Los Angeles, California.
