Friday, December 18, 2009


Switching costs are the costs incurred from changing from one brand to another. Tangible switching costs are things like laying a new telephone line. Intangible costs are things like the cost of switching to a new telephone number.

Vendor lock-in is when a customer prefers a different product than the one he uses, but not enough to pay the switching costs. Many vendors of high tech products work to increase their own lock-in and decrease the lock-in of their competitors. In some cases, for example computer hardware, switching costs tend to decrease with time.

Brand specific training for users of computer software is a lock-in that tends to increase with time. Users do not like changing from software they are familiar with, and the longer they use the software, and more proficient they become, the less willing they are to change. With enterprise software, the cost and risk of switching from one product to another is a powerful force maintaining the status quo.

Lock-in is the key issue in software marketing. The usual marketing ideas that apply to selling high margin consumer goods like fresh fish simply do not apply. In fact the normal rules our supply and demand are so skewed in the IT market that they are almost impossible to recognize.

Competing commodity software packages immediately become freeware. The reason is that the high initial cost of creating software combined with the low marginal costs per customer encourages vendors to increase market share by price cutting. If there is no brake, the market ends up spiralling down to freeware. If a new standard is introduced into the market, and it succeeds in becoming a real standard, your package may become a commodity and you may find yourself having to give it away.

But by locking customers into a solution, software vendors can reap sizeable profits even if their products are more or less the same as the competition. The reason is that the switching cost, and not the license fees for the software itself –- which tend to be a small part of the total cost of ownership -– is what is keeping the customer paying.

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