Fundamentals of switching cost accounting

It's 2 am, you can't sleep and it's raining. You have a hankering for Oreos and milk. You go to the refrigerator looking for milk only to realize you forgot to buy it yesterday. The shelf is bare.

You live 5 minutes away by car from a 7-11 and 25 minutes away from your local grocery store where you usually shop because the prices are much better. A quart of milk will cost you $1.50 more at the 7-11. Where do you go to buy your milk?

The answer will depend on the cost-benefit analysis that is going through your head. Here's how it works.

Value is the perceived (not real) tangible and intangible (emotional and social, not just technical) benefits of a value factor of a particular offering less the perceived tangible and intangible costs of the same. The thing you value most, your value factor, could be quality, price, convenience, speed, experience, or service. If the benefits exceed the costs, then you will make the appropriate choice. In the milk at 2 am case, speed and convenience overrides price, so you go to the 7-11. Others might make a different decision based on their value factors.

Behavioral economics, though, has taught us that consumers buy emotionally and justify rationally.

Research indicates that for a customer to switch from one product to another, there needs to be at least a 5 times greater perception of value. Consequently, if you want a customer to switch from the competition to your product, you have to understand and overcome their switching costs and offer something that mitigates them. In other words, you must have a value proposition that does their job at least 5x better than the competitive offering or the status quo.

Take the old-fashioned fax machine. If you thought it has gone the way of land line telephones, you would be wrong, despite all the hype from the high priests of digital health.

There is a reason Doximity still has a fax tab on their header tool bar, and only just recently added an email address on user's profiles.

This is a tool called the Forces Diagram that helps you understand why customers may switch or may not switch to a new value proposition or solution.

How much value are your customers getting from your products? Net Promoter Scores are one tool to answer that question but the authors offer another: Customer Surplus Value. The idea, drawn from economics, is to ask customers how much money they’d need to be given to give up your product for a period of time. The more money it would take for them to accept, the more valuable the product. An experiment at LinkedIn shows how this measure complements NPS scores as a way of measuring customer satisfaction

Likewise, there are a number of variables going through the mind of your customer when making the switching calculation. For example, here are the ABCDEs of medical technology adoption errors.Here's what you should know about dissemination and implementation. Here's what you should know about value, value factors and how to do a value factor analysis.

To make it even more complicated, even if you think there is more value to one offering over another, breaking old habits can be hard because your amygdala is fighting with your neocortex, resisting new synapses.

Despite all this, in most instances, since we all buy emotionally and justify rationally, you probably went to the 7-11 because you just felt like it. Too bad you forgot to buy the Oreos.

Arlen Meyers, MD, MBA is the President and CEO of the Society of Physician Entrepreneurs on Substack