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Showing posts from October, 2014

Learning about Types of Customer Switching Costs

It can take some time for a new customer to become a profitable one for the new supplier. At the same time, switching costs make it an expensive endeavor for customers to choose a new supplier. To help us understand the issue, let's consider three types of Switching Costs that exist: Direct Switching Costs These are the immediate costs for customers when they switch suppliers. There are costs incurred during the search for new suppliers, mostly in the form of time. There is often a contract penalty for early termination. Finally, there is the risk that the new supplier is not the reliable replacement that they appear to be. Relationship Related Switching Costs These are the costs incurred through the interactions with the new supplier. These "learning costs" are often underestimated when a customer entertains the switch. A new supplier often requires the customer to expand their comfort zone, and not many customers are thrilled to do that. Other relationsh