Switching costs

Definition

What a customer has to spend or risk in order to move to a rival.

Why It Matters

Switching costs are why a dull business keeps its revenue. A customer who would have to re-key data, retrain staff, re-permit a site or accept a day of downtime does not leave over a price increase, and that is what turns a customer list into a book worth paying for. Where they are low the revenue is only as loyal as the last invoice, and it leaves the month after a new owner raises rates. Ask what actually happens to a customer who cancels, in hours and in dollars, and price the answer.

In numbers: A book losing 5% of customers a year still holds 77% of them after five years; at 20% a year it holds 33%.