Switching Costs
Switching Costs · Lock-in
The costs (time, money, risk) a customer incurs when switching from one company to a competitor.
Competitive Advantage
What it is
Switching Costs are one of the primary sources of economic moat. The higher the switching costs, the more "locked in" customers are.
Types of switching costs:
- →Financial — cost of data migration, new licenses, consultants
- →Time — months of employee training, reconfiguring processes
- →Technical — dependency on proprietary APIs, data formats
- →Behavioral — habit and tool familiarity (users know Excel and don't switch)
Why track it
High switching costs = high customer retention = predictable recurring revenue = lower risk for investors.
Observe churn rate — low churn is a direct measurable proof of switching costs.
Real-world example
Microsoft Enterprise: Migrating from Microsoft 365 to Google Workspace for 10,000 employees takes 12–24 months and costs millions of dollars. Azure customers are bound by proprietary APIs and DevOps pipelines. Result: Microsoft 365 retention rate is ~97%+.