Module 1

Switching Costs I:
Importance of
Customer Loyalty

Why Prevent Switching? (I/IV)

Keeping your old customers is better than gaining new ones

because often customers are not profitable immediately!

Why Prevent Switching? (II/IV)

Example: Annual profit per customer after acquisition
Car insurance
US $ 200

Credit cards

3 4 5

100

4 5
3
2

0
2

-100
-200
-300

Wholesale

5
4
2 3

Why Prevent Switching? (III/IV)

Example: Churn in German mobile telephony market

Customer churn: Customers leaving firms

Increase in average quarterly churn rate from 0.9% in 1999

to 2.3% in 2009

Why Prevent Switching? (IV/IV)

Churn
(in 1000)

1000
900
800
700
600
500
400
300
200
100
0
1998Q4

E-Plus

O2 Germany
T-Mobile
Vodafone
2001Q2

2003Q4

2006Q2

2008Q4

What Are Switching Costs? (I/IV)

Example: Airlines

Cause of Switching Costs:

Frequent flyer program

What Are Switching Costs? (II/IV)

Example: Operating systems (Windows, iOS, Linux)

Cause of Switching Costs:

Investment in software / hardware
Training of employees

What Are Switching Costs? (III/IV)

Example: Toner cartridges for printer

Cause of Switching Costs:

Investment in printer

What Are Switching Costs? (IV/IV)

Example: Telephone network

Cause of Switching Costs:

Administrative costs
Number portability

Advanced Competitive Strategy

Tobias Kretschmer
Professor of Management, LMU Munich