{"id":22800,"date":"2018-05-10T00:00:00","date_gmt":"2018-05-09T18:30:00","guid":{"rendered":"https:\/\/www.moneyworks4me.com\/investmentshastra\/how-to-choose-a-stock-high-switching-costs-a-recipe-for-companies-to-hold-customers-for-life\/"},"modified":"2018-05-10T00:00:00","modified_gmt":"2018-05-09T18:30:00","slug":"how-to-choose-a-stock-high-switching-costs-a-recipe-for-companies-to-hold-customers-for-life","status":"publish","type":"post","link":"https:\/\/www.moneyworks4me.com\/investmentshastra\/how-to-choose-a-stock-high-switching-costs-a-recipe-for-companies-to-hold-customers-for-life\/","title":{"rendered":"How to Choose Good Stocks: Look for Companies with High Switching Costs"},"content":{"rendered":"

When switching costs are high, a company can hold customers for life!<\/strong><\/span><\/h2>\n

In a highly competitive market, where companies struggle to get repeat business from the same client, what is it that helps a company lock in its customers for life? It is the advantage of having \u2018High Switching Costs\u2019. These costs are monetary, psychological, time, and effort \u2014 which makes switching from the product almost impossible.\u00a0<\/p>\n

Almost all of us use computers. And the two software products almost all of us use are\u00a0Microsoft Windows <\/strong>and\u00a0Microsoft Office<\/strong>. If a new alternative program, which is even significantly better in terms of features, ease of use, etc. is launched, would people use it instead of these? Most people would not.\u00a0<\/p>\n

What keeps us from doing this?\u00a0 The costs involved. Is it only the monetary cost, we are talking about? No. It would definitely require a significant amount of money to shift, especially for a company, but what\u2019s more important is the psychological cost.\u00a0Switching will mean dealing with the unknown<\/strong>\u2014 to software which we don\u2019t know much about.\u00a0Learning it, using it, and becoming familiar with it will take a lot of time and effort<\/strong>. Add to this the innumerable applications which work well on Windows; we will forever worry whether the new one will work as well. Considering all this, you would rather stick with Windows and Office and keep purchasing their latest upgrades, sometimes grudgingly. The same is true for browsers and chat messengers (even though these are free).\u00a0<\/p>\n

Switching as a moat works for complicated products and services, as well as for something we all use every day, the morning newspaper. If you think changing your current morning newspaper, which hardly costs anything, is a simple decision, ask someone who has moved, e.g. from Chennai to Mumbai. You just don\u2019t enjoy your morning ritual anymore. The reason: you have got used to your newspaper, its style, typeface, layout, etc.\u00a0<\/p>\n

When is a switching cost an effective competitive edge?<\/strong><\/span><\/h2>\n

A company has switching cost as its competitive advantage when clients find the cost\/effort of switching from any of its products\/services not worth the trouble. If switching would mean developing a new system, educating employees to use it, investing time with the new vendor, developing capabilities that are not core to the business, or simply changing an entrenched habit, chances are that customers will not switch. Also, if customers are happy with the products and services of their current suppliers, they are inclined to give additional business to the same suppliers than find and work with new ones. Usually such additional business comes with higher margins. Hence,\u00a0having the advantage of switching costs ensures repeat business and new business from the same customer. This results in higher sales and profits. <\/strong>Such companies are also able to pass on cost increases to the customer either through price escalation clauses or renegotiations, thereby protecting margins.\u00a0<\/p>\n

Today, IT systems form the backbone of operations for most companies. Any company would like to have a stable and reliable system. Changing from one service provider to another could lead to serious problems, putting the entire business in a tizzy. IT Companies like Infosys<\/a> and TCS<\/a> get around 95% of their business as repeat business from the same customers. The costs involved in the implementation of the system and training of employees \u2014 sometimes across the globe\u00a0\u2014 make it difficult for customers of these companies to shift from them. \u00a0<\/p>\n

Do you have investments in companies that are difficult\/impossible to switch from? Find a few companies which have this moat and add them to your Stock Watchlist.<\/a>\u00a0<\/p>\n

Read Also:<\/strong>\u00a0\u2018<\/strong><\/span><\/a>Moat-5: Only a company with the lowest cost can compete on price and win<\/strong><\/span><\/a>\u2019<\/strong><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Switching costs ensure repeat business and new business from the same customer. The result is an increase in sales and profits. Read more.<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_is2025_no_summary":false,"footnotes":""},"categories":[1144,1151],"tags":[],"class_list":["post-22800","post","type-post","status-publish","format-standard","hentry","category-sensible-investing","category-stock-investment"],"_links":{"self":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22800","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/comments?post=22800"}],"version-history":[{"count":2,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22800\/revisions"}],"predecessor-version":[{"id":23207,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22800\/revisions\/23207"}],"wp:attachment":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/media?parent=22800"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/categories?post=22800"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/tags?post=22800"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}