One of the biggest blockers for new products are switching costs, which represent the burden incurred by customers when switching providers. We can group switching costs into three buckets: Financial, Procedural & Operational, and Relational.
Many new product teams underestimate the impact of these blockers and feel that they will be easy to overcome once their target customers get a chance to see their product. And sometimes that is true – a compelling enough offer that solves a big enough problem does indeed make it easy for companies to adopt a new product. And that’s really the spot you want to be in, and the question that you need to answer early in your product journey.
But it’s also important that you understand that no matter how compelling your value proposition is, there are always costs to switching to your solution. Don’t assume that just because you are solving huge problems that are compelling and obviously valuable, that it’s an automatic slam dunk for the customer. It’s up to you to understand what those costs are and have an arsenal of tools at your disposal to overcome those objections.
Let’s dig into these, and talk about how you can anticipate, plan for, and overcome them.
Financial Switching Costs
Financial switching costs represent the financial burden incurred when switching to a new product or solution. Companies usually will perform a cost-benefit analyses to determine if the switch to your product is worth it. That is a risk – the bean counters might kill your sale. But at the same time, it can represent opportunities.
Consider a Subscription Model
Many companies see the benefits of the subscription model which include more predictable costs, improved operations, and the great value of being able to offload platform infrastructure and DevOps to the vendor. You can and should tap into those benefits.
This is why there has been a steady migration to cloud-based services because companies recognize that these infrastructure costs for things like servers, complex private networks, security, and other costs are easily rolled into their subscription costs.
Discover Contractual Commitments
In your discovery, you also need to be aware of the contractual commitments that companies often have. Vendors are always looking to lock in multi-year agreements that can have significant penalties for cancelling their contracts. Your biggest competitors might have such vendor lock-in that no matter how good your solution is, and how great the numbers look on paper, the contractual agreements might represent an uphill battle.
Procedural / Operational Switching Costs
Companies switching to a new vendor always incur costs for switching to the new product, which includes the costs for things like training, support, new workflows, systems integration, customization, and many other factors that businesses need to consider. These procedural costs will also be part of the customer’s due diligence, and these will also be reflected in the financial switching costs.
Companies often face serious challenges from their internal teams when it comes to switching to new products and services. In some cases, new software solutions represent a more streamlined operation requiring fewer people to do the same tasks. Or, more commonly, the new solution requires enormous training and support, as well as adapting business processes to these new platforms. Just keep in mind that you can face serious headwinds from those teams that might see your solution as a direct threat.
If your product targets businesses, you need to have a strategy in place to help decision makers choose your solution. This includes streamlining onboarding, providing integration services with their other systems, robust training and support, and maybe even financial incentives to help them overcome these challenges.
Highlight Benefits
Create marketing copy that focuses on the value of your product, not just its features. Emphasize the financial benefits that your solution delivers.
ROI Calculators
Create tools for estimating the cost savings of your solution. If you can, put them on your website, or provide spreadsheets to aid their internal analysis.
Case Studies
Build a library of case studies and white papers that illustrate how other companies have had financial success with your product.
It’s also important to note that this can be a huge opportunity as well. Many companies, even now, have legacy systems that don’t talk to each other, need constant updates and patches, and represent organizational bottlenecks. This is where the benefits of your solution can overcome the procedural switching costs. It’s up to you to be prepared to assist prospective buyers with those cost-benefit analyses with case studies, savings calculators and worksheets, and other tools that make the case for your product or solution.
Relational Switching Costs
Relational switching costs are the losses from ending existing business relationships and are sometimes the most subtle and overlooked switching barriers that new vendors face. You can solve every problem and sometimes this is the one that kills the deal.
Businesses often have long-term relationships that have proven over time to be profitable and beneficial, which translates into strong loyalty. Often those relationships are made at the top management levels, and your target users might not be aware of the strength of those relationships.
Key Insight
This should also be part of the discovery process. You need to have discussions with not just your users, but also management and even c-suite level people that can give you insights into the strengths and weaknesses of the existing relationships.
And this is another area that can present enormous opportunities. It’s not uncommon that the biggest competitors have become complacent, and even unresponsive to their customers. As you are performing your competitive analysis, look for entrenched companies that are not serving their customers’ needs at the level they expect, and you can take advantage of those soured relationships.
Summary
Switching costs are real, and often present enormous blockers and barriers to entry into a market. For new products, understanding what those barriers are is key to being able to not just anticipate them, but also to create communications and tools to mitigate the costs for your customers to adopt your solutions.
