I’ve been thinking a lot about switching lately, partially because the Xmas season almost always makes me think I'd rather rotate out my old stuff than get anything new, and partially because I’m working on the health care industry, which--at least in the health-care-reform state of Massachusetts--is creating new options for consumers. Whether they will take advantage of the newly competitive marketplace, however, is another question. The question that has me thinking about switching costs.
Economists of the macro and micro variety have done a fair amount of work on the financial costs of switching, particularly when it comes to switching suppliers (from exit fees to breaches of contract). As the solid Wikipedia article points out, however, the emotional and social costs of switching are much harder to measure and consequently often under-estimated.
This is especially true with complex products, like financial services or health insurance. Even the thought of filling out the necessary paperwork is enough to stop most of us from considering the alternative. And when you add to the administrative burdens other secondary effects—the costs of explaining your new information (phone number, policy number) or learning a new system—the costs get pretty high pretty fast. The data suggests that costs savings (or some more soft calculation around additional benefits) have be in the 10% range to impact choice.
It might even be argued that as our lives and products get more complex, the resistance to switching is on the rise. The costs are relatively low when it comes to choosing a white chocolate peppermint spiced latte over your usual Mountain Dew smoothie. But when it comes to services and more complex products, it might require the aggressive strategies adopted by the telecom and cable industries, paying to switch and switch you back, to make a difference in the market. Anyone want to a try a new doctor? It’s on us.