Switching Costs Boost Firms' Competitive Advantage

Time to money; there are significant barriers to customers switching providers or suppliers which give firms such as Pearson and WPP an advantage over their rivals

Morningstar Equity Analysts 13 October, 2017 | 3:29PM
Facebook Twitter LinkedIn

Switching Costs Chart

Switching costs are one-time inconveniences a customer incurs to change from one product or service to another. Customers typically will not change providers unless the value proposition of doing so more than offsets the implicit costs. Price is not the only determinant of switching costs, as risk, hassle, distraction, psychology, and inertia can also come into play.

These costs occur in a variety of industries, where customers have invested time and money to adopt products or services that are important to their purpose, a dynamic we see in fields such as banking and application software. When switching costs are present, the cost, duration, and inherent risks of switching to a different vendor for a product or service with which the customer is familiar and has invested significant resources are too great to motivate the customer to change. This enables the incumbent vendor to enjoy high customer retention rates and/or pricing power that yield substantial returns on invested capital.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Dentsu Group Inc3,750.00 JPY0.00
InterContinental Hotels Group PLC4,555.00 GBP0.00Rating
Omnicom Group Inc69.09 USD0.00Rating
Pearson PLC576.20 GBP0.00Rating
Publicis Groupe SA57.08 EUR0.00Rating
The Interpublic Group of Companies Inc34.49 USD0.00Rating
WPP PLC1,057.50 GBP0.00Rating

About Author

Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.