We're now going to look at three different types of switching costs. Direct switching costs, relationship-related switching costs and product-related switching costs. So, what are direct switching costs? How do we think about direct switching costs? Well, these would be immediate costs that you incur when you switch suppliers. For example, switching suppliers obviously incurs that you need to search for a new supplier and searching for a new supplier can be cumbersome, can take time, can take effort. So, put yourself in the shoes of a large company that wants to change the maintenance of their IT network. Right, so at that point you are going to have to have a road show of all potential suppliers of all potential maintenance firms of this IT network. You don't know actually which one ever you're going to choose if that one is going to be reliable but in any case you're going tohave to spend quite a bit of time just figuring out which of those are going to be available and which of those you want to select. There might also be a contract penalty for early termination. Right, so in this case if you have signed up for a phone contract that you've signed up for two years, at that point if you want to break your contract after a year you're just going to have to pay the rest of the contract or the remainder of the contract. The same by the way if you take a credit. Or if you take a loan, that loan is typically tied for a couple of years. So, if you want to repay it early then there's going to be a penalty which gives you an incentive not to switch loans at that point. Other direct, or immediate costs of switching a supplier would be and that's related to the first point I mentioned would be the risk that the new supplier is actually not a reliable replacement. Right, so if you are going to a new car repair center, to a garage for the first time you don't know if that guy is going to be reliable. You don't know if you're going to get the same level of service as you did before. There's also sometimes very direct costs of exchanging suppliers. So, if your supplier in that case would be an employee then the cost of moving an apartment would be a direct cost of switching. Right, so administrative costs also if you have to go through the whole procedure of hiring someone and so on these would be direct costs, immediate costs of switching a supplier. So, let's have a look at the in-video quiz and I'll see you back in one second. Right, so let's get to the second type of switching costs. And these are switching costs that are related to the relationship with your supplier, right? So, that's a direct cost or a cost that you incur as a function of the direct relationship that you have with your supplier. So, how would think about this? These are the costs of interaction with the new supplier, instead of the old one. So, to begin with there are learning costs, you're just going to have to learn how to work with your new supplier. With your old supplier, you may have built up specific knowledge and a specific experience that basically is all lost if you go and work with a new supplier. There might be customer specific technical developments that the supplier has made for you. So, in other words if you've had long discussions with your supplier about a particular technological solution, switching suppliers means that you would lose that solution, you would lose that technological solution which of course means that you have either a lower quality solution with a new supplier or you're going to have to spend time, to spend effort, to spend money on convincing the new supplier to develop a similar solution for you. If a consulting company is replaced, so if a consumer or a customer goes to work with a new consulting company, then of course the specific knowledge that a consulting company has built with this client is going to be lost as well. So, these are switching costs that are related to the relationship between supplier and customer. Some other examples. and we spoke about these obviously at the very start of this module, but loyalty programs and accumulated quantity discounts. So, if for example you have a special relationship with a hotel where you put up all your guests then that might mean that you have to fulfill a certain number of nights a year to take advantage of a special deal, of a special offer or some sort of rebate. You lose that if you start switching between hotels. So, a consumer thinking of a loyalty program gives up the advantages that he's gained if he's reached a certain level, right? So, typically, when you have a loyalty program, the loyalty program goes in tiers and the higher up a tier you are in, the more significant the benefits are. And so if you switch that again, is going to mean that you will have to give up these advantages. Frequent flyer programs, as the example. So, you lose access to lounges. You lose access to priority boarding. You lose access free flights and mileage bonuses and so on. All of these things will keep consumers within one single network. and mileage bonuses and so on. All of these things will keep consumers within one single network. Now another type of relationship specific switching costs would be the psychological costs because you basically change the contact person. Right? So, we all have favorite restaurants. We all have favorite stores that we buy from. And this is not necessarily just because of the products or the goods or the services we get, but it's also related to the friendly welcome at your favorite restaurant, right? So, it's the friendly welcome and the smile you get if you go to a particular store where you go, say, once a week then automatically you like going there because you know people are going to be friendly, people know exactly what you want, what you like and so on. So, this creates a psychological cost if you were to switch your supplier. Let's now get to product-related switching costs. And those are costs that you incur through working with the new product, okay? So, this is not about the relationship, it's not about switching as such, it's about working with the a new product. So, first of all, there may be training cost and there may be a loss in productivity in the initial phase, right? So, you have to learn how to use a new type of computer you have to learn how to use a new type of software program. So, switching from Windows to Linux is difficult because there, of course, you would have to learn all the new commands but at the same time you would also have to acquire new software and so on which is something that is also going to contribute to the switching costs that you're facing. What are other costs? Replacing complementary goods for the new product. As I just mentioned, there would be a case for replacing software and changing from PC to Mac If you change the brand of your smartphone or the operating system of your smartphone, what automatically is going to happen is that all the apps that you invested in are going to have to be replaced. And that is what again creates switching costs that you only get because you're working with the new product. So, other costs of working with a new product: Switching costs can also incur for the firm's customers who are used to the firm working with the old suppliers, right? So, think of someone buying a car and if he buys a car, he will expect that there's certain elements say, the type of seats, the type of air bags, the type of tires and so on. And a consumer might feel he doesn't like that there are new types of supplies, new types of modules in this new car. So, software programmers for example would be used to buying PCs with Intel processors. If this now changes, if there are other processors then they might feel that this reduces their utility, that this reduces your ease of working with these products and therefore, they might face costs as well, which of course, lowers their likelihood of buying a computer even if it's the same brand but it's a new processor. So, of course this was a lot of material but let's now test this by doing an in-video quiz. And I'll see you back before we wrap up. Okay great. So, we now know that there are direct switching costs, there are relationship-related switching costs, and there are product-related switching costs. But what exactly does that mean for your business? I'll tell you in the next video. END
