── ── Startups
Switching Costs
Switching costs are everything a customer must pay, learn, redo, or risk to move from one product to another — financial, learning, data migration, integration, process, relational, and risk premium. They are routinely larger than founders model and customers anticipate at purchase time.
How it works
When switching costs are high, incumbents retain customers even when competitors offer better products, and new entrants must offer dramatically more value to break even. Paul Klemperer formalized this in 1987 (QJE 102(2)). IBM's 25-year mainframe dominance is the canonical empirical case.
Composes with network-effects, signaling-games, anchoring, and pmf-crossing-the-chasm.
When to use it
- user asks why customers don't switch to a better product, how to make a product stickier or build a moat, how to compete against an entrenched incumbent, why churn is low but revenue growth stalled, or mentions lock-in / vendor lock-in / stickiness / data moat / Klemperer
When not to use it
When the decision is routine and reversible, applying a formal method costs more than it returns.
Worked example
Klemperer's Foundational Theory and IBM Mainframe Lock-in
Paul Klemperer, then at Oxford, published "Markets with Consumer Switching Costs" in the Quarterly Journal of Economics in May 1987 (Vol. 102, No. 2, pp. 375-394). The paper was the first rigorous economic treatment of switching costs as a structural market property.
Install this skill (free, MIT)
npx skills add deciqAI/knowledge-skills