How to build switching costs into your product

Learn how early-stage companies can build switching costs into their products to lure customers from competitors, retain customers, and reduce churn.

It’s remarkably easy to get married in Vegas. You can show up in the morning, get registered for a marriage license, and tie the knot that afternoon for as little as $115. Getting divorced on the other hand is trickier — especially after the time period for an annulment (aka the “free trial”) has passed.

Depending on where you live, unraveling your Vegas wedding might go something like this:

Tell your partner you want a divorce.
Lawyer up and file for divorce.
Hash out custody and visitation rights for pets or kids.
Sell off joint assets and split the cash.

Getting married in Vegas is a lot like trying out new software. Getting started with a new tool for the first time is relatively easy, but leaving one tool for another can take months. The reason boils down to two words: “switching costs.”

Switching costs are baked into everyday products, services, and events. They can help you to retain your customers and also make it easy for customers to switch over to your brand. In this article, we’ll explore some well-known switching costs, how you can apply them to your product, and what to keep in mind. But first, let’s understand why customers switch brands.

Customer acquisition vs. retention vs. churn: why customers come, stay, and leave

The reasons why people buy a new product (new customer acquisition), stick with it (customer retention), or leave to a competitor (churn) are all intertwined. They fall under 4 major categories:

“The current solution sucks” - If your credit card comes with high transaction costs, that’s likely to make you consider switching.
“The new solution looks great!” - If a competing credit card company offers you zero fees and 60 days to pay off your balance, that’s really going to make you consider switching.
“But I’m already used to or locked into my current product” - Familiarity, status, rewards, lengthy contracts, and brand loyalty are all reasons why you might not want to leave your current product or service provider.
“The new solution is an unknown risk” - If the other solution is new to the market or doesn’t have enough value signals (like reviews from trusted people or websites), it might not be convincing enough to switch to.

That explains why customers come, stay, or leave, but how can we prevent them from leaving at all? That’s where switching costs come in.

11 switching costs that make your product hard to leave

Switching costs are the emotional, financial, social, professional, or personal reasons that a customer considers when deciding whether to stay with your product or switch to a new one.

No matter how epic your product is, users will eventually find a reason to leave. The key to sustained profits is finding ways to reduce customer churn by showing them what they’d be missing out on if they stopped using your product.

Below are 11 customer switching costs, in no particular order:

Opportunity costs
Network effects
Learning curves
Personalization
Certifications
Emotion
Money
Status
Effort
Time
Data

Let’s explore each one in turn.

#1 Opportunity cost

Opportunity costs are what you give up in exchange for something else. When you forego that chocolate bar for a salad, you give up the opportunity for candy in exchange for better health. You can apply this concept to your product through reward programs and loyalty points.

Reward programs are a great way to make customers feel special about buying from you and to encourage them to keep coming back. The more loyalty points they earn, the less likely they are to switch to a competitor as the opportunity cost of cashing in their points would be too high. Airlines do this masterfully: by keeping you addicted to earning more and more air miles, you become less likely to fly with a different carrier.

#2 Network effects

The more people use a platform or product, the more useful it becomes for every new and existing user. This is the basic definition of a “network effect,” and it can be a high long-term switching cost.

Facebook is the perfect example of this. With close to 3 billion monthly active users, most Facebook users are connected to their friends and family on the platform. They’d be hard-pressed to leave and start building new connections on a different platform. The same goes for WhatsApp, Twitter, Reddit, Clubhouse, and other platforms that let you connect with other people and consume their content.

Applying this concept to your product is easy enough: simply encourage and facilitate connections between your users, whether online (like on a social network) or offline (like in a book club). If you run a café selling artisanal coffee, for example, you can host a monthly event that brings together all your customers to try out new flavors. This becomes a moat for your business and raises the social and emotional cost of switching to a competing café that may not have the same networking opportunities.

#3 Learning curves

The amount of time you invest in learning how to do something — its learning cost — can be a low (or high) switching cost, depending on the activity. If you spent 10 years learning how to play the piano, you’re less likely to switch to the guitar. This concept applies to other products as well, especially in the world of software.

Take Adobe Illustrator, for instance. It takes many hours of practice to produce the kind of work in the video below:

Now, suppose you’ve spent years perfecting your workflow in Adobe Illustrator. It’d be hard for you to suddenly switch over to Inkscape or Affinity Designer overnight. Now, it’s not advisable to make your product difficult to learn, but you can create additional tutorials that deepen a user’s knowledge of how to use it (indirectly raising the cost to master it).

#4 Personalization

Customers love curated experiences, and personalization is an effective way to make them like you more. Learning a customer’s tastes takes time, and they’re less likely to leave if they feel that your product “gets them” and their preferences.

Take Spotify, for example. Spotify’s algorithm famously tracks multiple signals — like your most played genres, song replays, and similar popular songs within your demographic — to determine your music tastes and recommend new songs.

With listeners raving about how accurately Spotify knows their music tastes, any other music streaming app would struggle to take their market share because they’d have to convince listeners that they know their music preferences better than Spotify does.

#5 Certifications

Like learning curves, certifications take time to acquire, and they indicate your expertise on a specific topic. For example, your engineering degree might indicate knowledge of certain physical structures and tools. Likewise, your Facebook Blueprint certification tells the world that you’re a pro at Facebook advertising.

On their own, certifications aren’t all that important — until you need one to get hired. If the digital marketing agency you’ve applied to requires you to be Google Analytics certified, you’re far less likely to spend time mastering Microsoft Bing. This gives Google a competitive advantage over other search engines.

To increase the switching costs of your product, consider crafting a certification program for it. For example, HubSpot has a HubSpot Academy that mints new marketers every year, and many jobs in that space now require you to be HubSpot certified. If you can get your industry to declare your certification as a requirement, you’ve won.

#6 Emotion

It's hard for an existing customer to stop using a product they’re emotionally attached to. Take Facebook, for example. The site has built its brand around strong emotional connections to friends and family, so it's hard for users to quit the platform and try something new.

The key is to build emotional ties into your product through long-term behavior. Facebook, for example, is designed to make it hard to leave. Every time you refresh your feed, you see new updates from your friends, relatives, and colleagues; and when you publish something on your feed, you get a shot of dopamine through likes, comments, shares, and messages.

Emotions create a sense of belonging that makes it harder for people to leave, which is why many die-hard fans of Apple, BMW, and Manchester United would never dream of switching over to Windows, Audi, or Liverpool, respectively.

#7 Money

Humans are loss-averse creatures, especially when it comes to money. A great way to boost customer retention is by building a financial switching cost into your pricing model. You can do this in two ways: through lengthier contracts or clawback clauses.

Lengthier contracts typically come with a discount to sweeten the deal for consumers. For example, LinkedIn charges up to 64% less for users who opt for their annual Premium package over the monthly one. This makes it less likely that an existing customer will forego massive savings by canceling their subscription.

Clawback clauses specify a certain amount of money that a consumer needs to pay back if they cancel or renege on a contract. For example, your internet service provider may give you a "free" modem when you sign up with them, but if you cancel your contract within a year, they might bill you the full cost of the modem. This keeps you paying every month for at least one year, by which time they've already recouped the cost of your “free” modem.

There's another psychological cost to pricing known as "sunk cost." This simply means that customers are less likely to stop paying for something they've already spent so much money on.

For example, if you're paying $100,000 for a 4-year degree, it’d be pretty easy to drop out in the first year (when you’ve only spent $25,000) but you'd find it much harder to drop out 6 months before graduation. By that point, you'd be thinking of all the money you've already spent over the past 3 and a half years.

Concerning your product, sunk cost only kicks in after a paying user has been with your product for a long time. The more you work on your product, pricing, and retention, the more powerful the psychological cost of switching becomes.

#8 Status

Humans are status-seeking creatures, and we go to great lengths to obtain and maintain status signals. A prime example of status switching costs is the leaderboard element used on apps and platforms such as World of Warcraft, XBOX, and even Reddit through their karma system.

The more status points you’ve acquired on a platform or app, the less likely you are to abandon it all to start from scratch on another platform. You can build status switching costs into your app or product by providing the following:

Leaderboard - Show how well your users perform in the app with rankings or leaderboards, like ProductHunt does.
Achievements - Provide a list of challenges or accomplishments to garner status, such as the number of races won in a game or calories burned in a day. Make it easy to share these achievements, too.
Rewards - Invent ways to reward users for spending more time on your app, such as unlocking extra features, bonuses, levels and abilities, new outfits, etc.

Beyond these steps, building a strong brand around your product forms a switching cost that dissuades people from leaving. We’ve previously covered brand positioning and messaging in our sprints — see how it works on our website.

#9 Effort

You can reduce churn by making it harder for people to leave. For example, magazines like the New York Times and Cosmopolitan make it easy to subscribe with a few clicks online. However, canceling your subscription on either of those websites is notoriously difficult, as you have to call their customer service hotline and tell them why you want to cancel.

Of course, their Retention Departments are trained to convince you not to leave by sweetening the deal with special offers and discounts. What was meant to be an easy, 5-minute cancellation call quickly becomes a 30-minute sales pitch on why you should stay.

There’s a downside to this strategy, however. Customers now have access to online reviews about your product, and if canceling your service is a hassle, they’re more likely to not subscribe in the first place. Plus, there are other ways to cancel a subscription without going through you — by canceling the payments at their bank, for example, or turning off the recurring payment in their PayPal account.

It’s better to make subscribing and unsubscribing a faster, smoother, and less stressful experience than trying to make a customer jump through hoops to get something done.

#10 Time

Time is precious, and the longer someone has to wait to get something, the less likely they are to switch to a new product that will make them wait just as long — or even longer — to get the same benefits.

Take health insurance, for example. Many health insurance providers force a delay of a few months before new members can enjoy access to certain services, such as surgery. This is meant for new members to contribute premiums to the pooled fund before drawing from it. Crucially though, it prevents existing members from jumping ship to a competing health insurance provider since they’d have to wait 3-6 months again before getting access to major medical benefits.

So, how can you apply this to your product? If you run a message board or online forum, for example, you can declare that new members can only post after they’ve been active for 30 days. Certain communities on Reddit enforce this rule. This makes them less likely to engage elsewhere after waiting so long to post on yours.

However, a time-based cost only works if your competition is doing the same thing or if you are a clear market leader in your space, like Reddit. If you enforce a delay in your medical aid plans, for example, but your competition allows everyone to start booking surgeries from Day 1, you might experience high churn.

#11 Data

Creating and storing data is an in-built switching cost of many products. The longer a consumer uses a product, the more data they generate — and the less likely they are to churn, especially if there’s no easy way to port their data over to a new product.

Imagine switching over from Gmail to a new provider like Hey.com. In this case, your content (like your emails, calendar entries, and contacts) becomes a switching cost. You wouldn’t be able to search for or delete previous Gmail messages from your new Hey.com inbox easily.

Facebook is another example of this. Long-time users generate a lot of photos, videos, status updates, Stories, and connections. The thought of leaving all that to start afresh on a new social network is enough to keep many people on the platform. This was the case until 2018 when Facebook introduced data portability, making it easy to transfer your Facebook data to a new platform.

Make it easy to join

We’ve talked a lot about stopping customers from leaving, but the other side of the equation is making it easy for customers to switch from their existing service providers to you. To do that, you need to lower the switching costs of doing so.

You can accomplish that goal by doing any of the following:

Lower the financial switching cost: Offer free trials, discounts, money-back guarantees, or free months on an annual package. Consider lowering the transaction cost of doing business with you.
Lower the psychological cost: Play up the benefits your customer will gain and the lowered risk of switching over to your product.
Lower the learning cost: Highlight the shallow learning curve of your product or service.
Lower the social cost: Highlight how other users are successfully using your product.
Lower the time and effort cost: Offer to assist with onboarding and porting over their data from previous products or service providers.

Make it harder to leave

Churn is inevitable. With so many factors influencing a customer’s decision to keep using your product or switch over to a competitor, it’s your responsibility to convince your customers that staying with you is the better choice.

You can accomplish this by building different switching costs into your product based on time, effort, scarcity, data, or network effects. The more of those elements you can combine, the costlier switching becomes, and the more customer loyalty you’ll enjoy.

There’s just one problem:

Building switching costs requires you to deeply understand your product, market, business model, and customers.

We’ve created a set of sprints to help founders and startup teams dive deeper into their unique value proposition, their positioning and messaging, and how to build better customer relationships.

The sprints are designed to be completed in a few days and will clarify what makes your product or service different from the competition — and how you can launch your product to positive reception.

Read more about our founders’ marketing playbook and sign up today!