How to measure switching costs

At a glance

What do a legal contract, a frequent flyer program, and a razor have in common?

They all help brands lock in their customers, making it difficult for customers to abandon their brand for a competitor.

Marketing professionals call any deterrent to customer defection a "switching cost," and if you understand and manage them, you'll be in a great position to cultivate loyal customers.

A switching cost is the perceived burden a customer faces when they leave one product or service provider for a competitor. Switching costs meaning ranges from a few minutes of hassle to real financial loss, and understanding what switching costs are helps you predict and reduce customer churn.

Having to search for reviews of a competing brand, learning how to use a new piece of equipment, or even physically visiting a different store may keep customers from buying your product. If the switching costs for your product are high, customers will be deterred from defecting to a competitor.

Many switching costs emerge naturally, but others are manufactured by companies themselves.

For example, fans of video games observe high switching costs because they are socially and emotionally involved in game play.

This makes gamers unlikely to abandon their favorite video games for an untried alternative. 

When a customer buys a brand new, expensive item like a kitchen appliance or even a house, switching costs are naturally high.

For large purchases, there are more psychological and financial implications to switching costs because much has been invested in the purchase, making it difficult to switch.

Over time, as the item ages, switching costs lower and replacing the item becomes a possibility.

Or, if the customer becomes bored or fancies a change, switching costs also lower. 

You can also keep customers loyal through strategic marketing techniques that increase their perceptions of switching costs.

If you're a cellphone plan provider, you might require that customers sign an 18-month contract and pay an early termination fee for ending the contract before the 18 months has elapsed.

Or, if you sell packaged goods with many similar or identical competitors, you might aim to offer the lowest possible price.

Customers are usually unwilling to switch to a higher-priced rival for an undifferentiated product such as packaged ice or bleach.

How do you know if your product has natural switching costs or whether it's time to think about creating some?

Predicting buyer behavior will help you understand the decisions people make behind what they purchase and what would make them purchase something else.

For any given product, switching costs can be classified as high or low.

In an ideal world, switching costs for your product will be high, cultivating lucrative customer loyalty.

Firms that create high quality products or products which take time to learn and understand how to use tend to enjoy high switching costs.

For instance, many users of Apple MacBooks are fiercely loyal, and one of the reasons is that switching to Windows or another competitor would mean unlearning Apple’s interfaces and software, and mastering a different set of skills.

Apple cleverly increases those particular switching costs by providing free classes for customers to learn Mac’s operating system.

Switching costs will also be high if there are few substitutes for your product, if it is very high in demand, or availability for it is restricted. 

When switching costs are low, you are at risk of losing customers to rivals.

Grocery stores tend to have low switching costs, because shoppers are able to find the same products easily in a competing store and can compare product range and prices either online, or by simply walking from one store to another.

This is one of the reasons why supermarkets have introduced loyalty programs: customers may be willing to continue shopping at a certain store if they have the opportunity to gain rewards based on spend.

Do you need to know whether switching costs for your product is low or high? There are five main reasons for measuring switching costs:

High switching costs discourage customers from swapping to an alternative product or provider.

If firms in an industry know that switching costs are high, they have little incentive to actively compete through aggressive marketing strategies.

Investing in expensive advertisements, or engaging in costly price wars in an effort to entice customers is a waste of resources in an industry with high switching costs.

If the switching costs for your product are low, it might be worth implementing techniques to keep customers loyal.

For example, you might create a legal contract that specifies the amount of time that a customer must use your service, or set up a loyalty program that offers discounts for repeat purchases.

If the switching costs for your product or service are very high, you have much more freedom over how to price your goods.

For example, the accounting, payroll and tax software developed by Intuit are closely integrated with one another, which makes it very difficult for small businesses to switch out one product for a competitor.

This stickiness allows Intuit to charge high prices for its products—all while retaining highly loyal customers. 

High switching costs keep customers loyal — but only as long as they remain satisfied. Imagine you own a popular hotel for tourists.

Your guests are usually happy, but this summer, you expect satisfaction to fall because of planned construction work.

If switching costs are high, you might not need to worry about whether your guests will come back for another season.

But, if switching costs are low (say, because a new boutique inn has just opened in the vicinity to raving reviews), you might need to introduce a sweetener, like free breakfast, to entice your unhappy customers back.

Switching costs can be a valuable component in forecasting models because they are predictive of buying behavior.

When switching costs are high, customer repurchase intentions are also likely to be high, which can help you estimate sales—crucial information for making decisions as diverse ase how much inventory to order and what times to open. 

There are many different ways of categorizing switching costs.

Switching costs might be classified in dollar amounts and estimated in terms of the price difference between the current supplier and an alternative.

Vendors, products, and services that offer the lowest prices tend to have high switching costs.

Manufacturers and retailers of low-priced items have clever ways of further increasing monetary switching costs in the minds of consumers. This can cause customers to stay loyal, even where the monetary costs are higher than if they were to abandon the product for a competitor.

One popular technique is known as the "razors and razor blades" model, whereby a core product is sold very cheaply, but costs are recouped through relatively expensive replacement parts, consumables, and maintenance fees.

Manufacturers of branded razors often offer the main product at a low price, but charge a premium for the razor blades, which must be purchased regularly.

This causes the consumer to remain loyal to the brand, because if they switched to an alternative razor blade, they would have to buy that brand's matching razor, making the existing razor a sunk cost — an unrecoupable loss.

Printers (which only work with certain types of ink) and vehicles (which often have parts that can only be replaced with manufacturer-branded parts) have high switching costs for similar reasons.

These revenue models create psychological commitment to the brand that translates into high loyalty and high spend.

However, switching costs can also be non-monetary in nature.

Many brands are so well known and so well trusted that customers feel unable to switch from them to a competitor, even if the competitor offers a better-quality or lower-priced product.

Heinz ketchup is a prominent example: Michelin-starred restaurants that have tried to offer patrons fancy alternatives have found that guests simply don't want them.

There are four common switching costs that you can use to deter your customers from jumping ship and going to a competitor: convenience costs, emotional costs, contractual costs like exit fees, and time-based costs.

Convenience costs are costs associated with the inconvenience of switching to a competing product or service.

For example, if your products are widely available, or if you have many different retail outlets compared to a rival, it will be more convenient for customers to buy your products instead of your competitors.

This puts you in a great strategic position, even if your competitor has cheaper products or sets up an enticing promotion, your customers are likely to stay with you for convenience. However, convenience can be psychological as well as physical. 

If you have ever tried to change your provider of electric or wireless services, you know it is often simply more convenient to stay than to invest the time and effort in switching.

And, if customers perceive that they have to spend time and effort to reach the same level of comfort of knowledge of a new product as they have with their existing product, they may decide that the learning effort is not worth their time. 

Many customers stay with their preferred products and existing service providers because of the implicit switching costs associated with psychological involvement and emotional commitment.

When a customer has been with a provider for a long period of time, they have likely built up trust in the product or service, or a personal rapport or bond with the provider.

This presents a psychological obstacle to switching and that psychological cost shapes decision making, even where performance or quality is less than satisfactory.

Seeking out a new product or supplier and building a new relationship could simply incur too high a psychological cost.

There are also higher perceived risks associated with changing from a known service provider to an unknown competitor which cannot be evaluated before actual purchase.

Customers usually want to avoid the accompanying psychological discomfort and emotional stress, as well as the risk and uncertainty that the termination of the current relationship could bring.

Contractual switching costs are the financial costs associated with terminating a relationship with an existing provider and starting a new relationship.

The most common type of contractual cost is an exit fee or an early termination fee which is typical in service-based relationships.

For example, a bank might charge customers a cancellation fee for closing their account. However, contractual costs can also be understood in terms of opportunity costs: the financial benefits lost when switching to a new product or service provider.

If a credit card customer decides to close their account and open another with a different company, they might lose all of the ‘points’ they’ve accrued through historical spend and access to other rewards like vehicle breakdown coverage or collision waiver for car hire. 

If customers expect that switching to a new brand will take a long time, they will often choose to just stay with their existing provider.

For instance, if the paperwork involved in cancellation of an existing service is perceived as burdensome, customers might decide that it is not worth filling out.

Search costs also grow with the length of time that a customer has been buying a product or service.

Search costs are the time, effort and learning costs associated with searching for an alternative, and if customers believe that the search for a replacement will take a long time, they will often opt to continue with their existing provider. Loyalty also includes habit and routine behaviors.

The apathy brought about by time constraints on customers’ time creates an inertia that impedes switching.

Switching costs can be estimated based on your knowledge of the product and your consumer. However, unless you directly tap into your market, you could easily under- or over-estimate switching costs. 

Imagine, for example, that your company offers a proprietary piece of tax preparation software. For consumers, preparing their own taxes is cumbersome and difficult, and could lead to expensive mistakes. 

Hiring an accountant could cost three times the price of your product, making your software very popular. You may assume that once customers have mastered your software, they're unwilling to switch back to doing their own taxes or hiring a professional, so switching costs for your product must be high.

We’ll use this example to measure switching costs.

Get specific: is it price-driven defection, a feature gap, or a service failure? A clear trigger question keeps the survey focused.

From our example: what happens when a competitor comes along with a new solution?

Perhaps their software uses AI and can be learned in a flash. Perhaps it's free.

Unless you're certain that your customers are loyal, and crucially, you know why they're loyal, you run the risk of losing them in droves to new rivals.

Separate active customers from recently churned customers and prospects considering a competitor. Each group reveals a different piece of the switching-cost picture.

For example:

The best way to avoid pitfalls is simply to ask your customers using a survey.

Use a Likert scale (extremely likely to not at all likely) tied to a specific trigger, such as a price increase or a competitor promotion.

Returning to our software example, an easy way to do this is to ask a question like this:

"If another [product] were offered at a lower price, how likely would you be to switch brands for your next purchase?"

Follow up with open-ended or multiple-choice questions covering financial, procedural, and relational switching costs, so you know which type of cost is driving loyalty or churn.

A tax software customer who says they're "not at all likely" to switch might be thinking about the money already sunk into a subscription (financial), the hours it would take to re-enter years of filing history (procedural), or simple trust built up after several accurate returns (relational).

Each reason points to a different retention strategy, and lumping them together will cost you the insight.

Track switching-cost scores over time and against industry benchmarks so you can see whether loyalty is strengthening or eroding as your product, price, or market changes.

Run this survey on a regular cadence, not just once. A competitor's AI-powered tool launching next tax season could change your customers' answers overnight, and the only way to catch that shift before it shows up in your churn numbers is to keep asking.

Switching costs are the perceived burdens or obstacles a customer faces when leaving one product, service, or provider for a competitor. They can be financial, procedural, or relational.

In marketing, switching costs meaning refers to any deterrent — financial, time-based, or emotional — that a company builds in or that naturally exists to keep customers from defecting to a rival brand.

Examples include cellphone contracts with early termination fees, enterprise software with steep learning curves, and loyalty programs where switching means losing accrued rewards.

The most reliable way is to survey your customers directly, asking how likely they'd be to switch under specific conditions (like a price change), then following up on why — see the 5-step guide above.

Switching costs directly affect how vulnerable your customer base is to competitors. Understanding them helps you price confidently, decide where to invest in loyalty programs, and forecast churn risk before it happens.

Want to know what's really keeping your customers loyal — or what could push them to switch? SurveyMonkey LaunchPad is a suite of ready-to-run, automated market research solutions built for exactly this kind of question. Instead of designing a study from scratch, you configure a solution in minutes and get decision-ready results back in hours, not months.

Two LaunchPad solutions are especially useful here: Idea Screening helps you validate which retention ideas or loyalty offers are most likely to resonate with your audience, and Feature Prioritization (powered by MaxDiff) shows you which product features or benefits actually drive customers to stay. Both remove the guesswork from understanding what your customers value most.

Explore SurveyMonkey LaunchPad to see how automated research can help you understand — and reduce — the switching risk in your customer base.

Ready to ask your own customers directly? Start with the market research survey template to build a switching-cost study in minutes.