I’ve mentioned switching costs a few times as good opportunities to either earn more or save more money. Switching costs are all around us. We interact with them every day. Smart businesses exploit these to make more money. But we can exploit these to both save and make more money ourselves if we recognize the opportunities. Let’s define switching costs, bring to light where they pop up in our lives, and talk about how to exploit these for our benefit.
Switching Costs Defined
Switching costs are the mental, emotional, time, and financial costs of changing.
Okay that was my stab at it. But since I learned everything I know during my 4 year undergrad degree in Finance from investopedia and Paddy Hirsch on YouTube, let’s hear what they have to say.
Switching costs are the costs that a consumer incurs as a result of changing brands, suppliers, or products. Although most prevalent switching costs are monetary in nature, there are also psychological, effort-based, and time-based switching costs.Investopedia.com
Okay, it seems like our boy Paddy never did get around to needing to discuss switching costs, but I’d be remiss if I didn’t share at least one video with you. And since we are currently experiencing the highest inflation rates we’ve had in 40 years, let’s hear Paddy Hirsch define inflation for us then get back to switching costs.
Where are switching costs found?
Switching costs are all around us. And as soon as we understand them and can recognize them, we will start seeing these more and more in our every day lives. Let’s throw out a few examples of where we see these in our every day lives.
Cox Communications – A Case Study on Switching Costs
Ever wondered why your hold time is non existent when trying to reach the sales department, but it’s a 3 hour wait to reach support? Or worse, the termination department? Spoiler alert, it’s not because the support team has a few people out sick. It’s an intentional allocation of resources.
Cox communications comes to mind here. And unfortunately for the United States, they are available in about 20 of our 50 wonderful states. So there’s a good chance you feel me on this one.
Cox is hands down the worst company I’ve ever dealt with. I would first go on a satellite internet plan (or even entirely without) if it meant never having to use them as my Internet Service Provider (ISP) again. If you need to speak to someone at this company, prepare for the longest wait of your life. You will be on hold for 30 minutes while listening to an automated voice tell you that they value your time and will be with you as soon as they can.
You might also hear the ever so clever, “Wait times are longer than normal.” Which can be translated as, “We are going to see how few customer service reps we can employ before we get sued over it.” Oh my gosh, my blood pressure is up just talking about this.
The point is, a smart business will make switching costs incredibly high which reduces the likelihood customers will switch. Now, smart businesses might not do it in such an annoying way as Cox does, but they will at least be aware of it. When switching costs are high, customers are less likely to switch. Smart businesses know this and they exploit it.
How To Exploit the Switching Costs of Consumer Service Providers
Honestly, you might just have to suck it up and get it done. It might require white knuckling it through a 2 hour wait time or even ponying up that $200 for early contract elimination. Be relentless when they’re trying to offer you a deal to stay on with the provider (cough, cough, COX!) Remember how miserable you were with them and GET OUT! Be wary of annual service contracts. Be wary of termination fees. Read the fine print on the contracts you sign.
This all sounds like obvious stuff but sometimes if you realize that you’ve got yourself in a bad situation, the only way out is to grit your teeth and get through it.
Your Job – A Personal Case Study in Switching Costs
Believe it or not, your job is another place where we see switching costs in action. Think about it. If you hate your job and want to quit, you sure can. It’s not necessarily difficult to leave, but employers know that it’s difficult to find jobs and get hired.
Obviously at this very moment in time (February 2022) jobs are in historically high demand, but this is generally true.
If you look into it, you’ll find that the best way to grow your income is to switch employers every so often during your career. You would think the opposite. You would think that you would be rewarded for your loyalty at your current employer. But what you’ll find is – it is difficult to get raises much above the cost of living adjustment each year if you stay at your current employer. Whereas if you switch every couple or few years, that’s a big opportunity to negotiate a meaningful jump in your salary and go for a position a level above which you currently work.
Two Fallacies in Action: The Grass Is Always Greener & The Devil You Know
Hate to break it to you. But the truth is, the devil you know might be better than the devil you don’t (Tendency to stay in your current job instead of switching). However, the grass is always greener on the other side (Tendency for employers to see more value in new candidates than existing).
Many employers will prefer to hire a new candidate for a position rather than promote from within (Grass is always greener fallacy).
My point is, a 10% raise at your current employer is almost unheard of. They know that kind of thing is not sustainable and that it will create some unrealistic future expectations. But a 10% raise by switching to a new employer is entirely possible as the new employer doesn’t know what you currently make and hasn’t yet anchored you to a salary yet.
How To Exploit the Switching Costs of Your Job
Switching jobs is a headache. Your boss knows it. Your future employer knows it. And even your spouse and kids probably know it.
If you want to exploit these switching costs, you have to be willing and able to get a new job every 2-3 years. You have to be willing to relocate to different states. You have to make it clear to your new employer that you’re making sacrifices to take the new job and use that as leverage to get a higher anchor point in your salary.
Don’t want to switch employers? You will have to try to get an offer from a new employer and take it to your current one. Your mileage will vary with that strategy so use it wisely. It’s a signal to your current employer that you’re not loyal and certain managers will see this as a major red flag and promote other people who are more “loyal” than you.
Or you can always just ask for a raise above the cost of living adjustment each year. These are all risky and difficult to execute moves, but the alternative is your pay increases a measly 2-3% a year while your idiot friend who sucks at his job gets a 10-20% raise every 2-3 years by having the gumption to switch employers.
Remember, the devil you know is better than the devil you don’t which is why you’ll prefer to stay at a job you hate that pays crap over switching.
And the grass is always greener on the other side which is why you’ll get hired to do a job that might be a reach for you while your employer might have had some candidates internally who were better qualified and more loyal who would have loved that job.
You have to view this from both sides. Getting passed up on internal promotions and opportunities? Become the greener grass to a new employer. Hate your job? Switch. Go meet the devil you don’t know head on and kick him in the freaking teeth.
Oh boy, I might be ruffling some feathers on this one, but I can’t help it. Your marriage is such a great example of high switching costs I just can’t help but mention it. What did we learn so far? Switching costs are the emotional, mental, physical, time, and financial costs of changing something. Well, guess what? I think our marriages are the highest switching cost of all.
What all goes into getting a divorce?
- Each of you finding, hiring, paying for, and working with an attorney (Divorce Lawyers are $270 an hour. Do the math.)
- Deciding how to divide up all your assets (Residence, retirement accounts, cars, boats, furniture, plants, etc)
- Determining and paying alimony
- Determining and paying child support
- Ripping apart the closest relationship that exists and trying to heal
- Finding a new place to live
Okay, I suppose I could continue, but this is already depressing. Getting divorced has a huge switching cost. And all the aforementioned costs are all only costs of leaving! Now, if you want to get married again, you will need to go back to the dating phase and worry about online dating, first dates, first kisses, who’s going to pay, and whether you’re going AMC or Cinemark!
How To Exploit the Switching Costs of Your Marriage
Don’t get divorced.
Obviously I recognize that there are situations where this might be necessary and better for you in the long run. I know there spouses everywhere experiencing violence, abuse, and infidelity. But take the decision to get married seriously and take the decision to get divorced even more so. This is no joke. This is one of the highest switching costs both emotionally and financially and it’s best avoided all together if possible. Anyway, I’ll stop stepping on toes.
Other Examples of High Switching Costs
- Cell phone service
- Internet Service
- Switching mobile or laptop operating systems (Apple did this very well) (So did Google)
- Banks or Investment Accounts
Call To Comment
What are some examples of high switching costs that I missed? What are some ways that you pushed through a high switching cost decision and came out better on the other side?