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

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Dentsu Inc3,100.00 JPY0.16
InterContinental Hotels Group PLC3,932.00 GBX-0.91
Omnicom Group Inc49.10 USD0.41
Pearson PLC552.20 GBX2.91
Publicis Groupe SA26.43 EUR-0.08
The Interpublic Group of Companies Inc16.83 USD3.38
WPP PLC588.20 GBX1.41

About Author

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

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