Switching Costs- Meaningful Relationship Between Need and Investments
Note- this is one of my abstract notes based on various learning of basic terms and application.
Switching cost is a type of competitive advantage enjoyed across strategic space:
- Create an entry barrier
- While switching suppliers
- While selecting substitutes
- For customer when they choose buyers
I always thought could switching cost be a reason for brand loyalty? If yes what will be those attributes which drives the identification process?
Take this scenario I want to buy something now for an old investment and I need compatibility between both new and old. Now my investment can be a physical investment in may be setting up a equipment, setting up a relationship, an informational investment in finding how to use the product, about characteristics, an artificial created investment in buying high priced first unit and then allow subsequent units to buy cheaply. Finally may be a psychological investment.
But the bigger question what is driving me as an individual to create this switching cost:
Need 1: I have equipment and need compatibility. (Like camera with lenses, Razor with blades, water purifier with filter)
Need 2: I have to spend high transaction costs for switching. (One bank account to other, lease against buy)
Need 3: My cost of learning’s to use new brands (soft ware, qwerty key board)
Need 4: I don’t know what the new product or services will be. (gamble of trying new more so at drugs)
Need 5: I have loyalty contracts, which may expire. (reward points, discount coupons)
Need 6: I do have emotional costs of switching. (cigarette brand, mothers cooking!)
Inter relationships of need and investment
If we see I found Need 1 is the only place where we need all sort of investments. That’s the place where need is required with compatibility.
Need 3 (learning) and Need 5 (loyalty contract) are the ones with second highest investment propositions.
Clarification- why switching costs for a bank is not a psychological investment. We need to differentiate here that customer has already made up his mind and ready to switch. He is fed up with something and wants to move on.
Moving forward I wondered whether these needs could be further segmented to:
- Frequent need
- Long term need
- Affordable need
- Joint need
Once again first need satisfies most of the clear runway.
Practical Application of Need 1
Any Winners?
Water and air purifier business:
Investment: we need a physical investment, information is required to run, machines are artificially increased with price, health consciousness plays a psyche spoiler.
Need segmentation:
Water purifier have to be regularly maintained, required for a long term, affordable as well, and jointly required for family.
Listed Boys- I don’t know!, Air Purifier- ???
Please do let me know whether you can spot any other business. I will also continue to search. Let me know questions if any.