Higher ‘switching costs’ help drive customer loyalty

Higher ‘switching costs’ help drive customer loyalty

Higher ‘switching costs’ help companies retain customers and can even encourage them to spend more.

Those were the overall conclusions that came from several studies involving Professor Markus Blut, an expert in marketing at the Aston Centre for Retail Insights, part of Aston Business School.

Prof Blut discussed his research findings at the latest Fresh Perspectives talk in Birmingham on Tuesday 10 October, co-hosted by Aston Business School and SimkissGuy Recruitment.

He said: “Switching costs are customer perceptions of the time, efforts and one-time financial costs associated with the process of switching from one provider to another.

“Customers from numerous firms regularly have the feeling of being ‘locked-in’ in with their current provider due to the presence of these switching costs.”

An example of this was a recent study of the energy market which revealed that around 13.5 million UK households stayed with their energy company, missing their share of £2.7 billion potential savings they could have made by switching to another provider. (Department of Energy & Climate Change 2015)

Prof Blut explained that there were three types of switching costs: procedural, financial and relational.

Procedural switching costs were made up of economic risks, evaluation, learning and setup costs, mainly involving time and effort. Typical responses from customers include:

  • “I cannot afford the time to get the information to fully evaluate other service providers.”
  • “I worry that the service offered by other service providers won’t work as well as expected.”

Financial switching costs were made up of potential benefits and financial losses, usually quantifiable in financial terms. Typical responses from customers include:

  • “Switching to a new service provider would mean losing or having to replace points, credits or valuable services.”
  • “Switching to a new service provider would involve some up-front costs – such as set-up or membership fees.”

Relational switching costs were made up of personal and brand relationship losses, involving psychological or emotional discomfort from the breaking of identities and bonds. Typical responses from customers include:

  • “I like the public image my service provider has.”
  • “The people where I currently get my service matter to me.”

Prof Blut said that by focusing on these different areas, companies and brands could increase the perceived switching costs to improve retention rates.

He added: “By building a foundation for loyalty and creating loyalty bonds, a brand or company can successfully reduce churn factors, retaining more of their customers.

“These higher switching costs are helpful to not only retain customers but also make them spend a little more.”

Book your free place at the next Fresh Perspectives briefing ‘Musical block? Brexit’s influence on the UK love music industry’ on Thursday 26 October.