As we saw in the old business paradigm, customers used to have a limited ability to switch to competitors without incurring risk. Think back to Sarah’s scenario where she risked having to pay an increased penalty by breaking her contract early. Companies in the old model create barriers to switching as a method to dissuade customers from leaving. These include long contracts, expensive penalties, and long wait times for very limited services.
But as competitors slowly entered the market and competition for customers increased, these barriers which used to prevent or dissuade customers from switching were removed. Suddenly it became much easier for customers to move to a competitor.
We’ve seen a similar trend in SaaS with falling switching costs. Less than fifteen years ago, first-to-market SaaS had few competitors. They usually had between three and five main competitors. Back then, the cost for a customer to switch from one company to another was relatively high as features and benefits were distinctive and unique to each platform. For customers, it was often a difficult choice to switch because it meant buying a product on features which may or may not be available in the competing product. Switching to a competing product meant risking the loss of valuable features and risking possible unintended consequences.
Today, these same SaaS businesses have so many competitors with similar features and benefits that switching costs have become relatively low. For the customer, the risk of losing features by moving to a competitor or having unintended consequences from switching is nearly non-existent.
As more SaaS and subscription businesses emerge with similar features and benefits, switching costs will continue to drop and increasingly disappear. In some verticals, this rapid decline in switching costs, coupled with an increase in market competition, has led to the virtual disappearance of risk for the customer. The risk to switch is so low that one survey found that 63% of DTC customers leave after one poor customer experience.
For consumers, the decrease in switching costs is liberating. Customers who expect better products, better service, better experiences and better price are now increasingly able to simply choose another company when they’re not satisfied.
For companies, this increase in competition and lower switching costs means, to retain their customers, they must provide a great product, great service, high value, competitive prices and great customer experiences (CX).
Companies can relatively easily cope with the demands of better prices, better products, more features, and better service. Overall, these are easy to measure and can be addressed in a relatively straightforward manner.
Conversely, meeting increasing customer expectations and demands for better CX is not so straightforward. It’s a challenge to understand, let alone meet, something which is in constantly changing and difficult to quantify.
Yet this imprecise expectation of better CX is where vast opportunity lies for businesses to retain customers, increase loyalty and to differentiate from the competition.