Information Technology and Switching Costs Information Technology and Switching Costs

Switching costs, the real or perceived cost of changing product providers, has become increasingly important in information-intensive businesses. Reduced search and transactions costs have made it possible for customers to more readily evaluate alternative suppliers, increasing switching. At the same time, the high fixed cost structure of customer acquisition and operations in information-intensive businesses increases the impact of customer switching on profitability. Fortunately, the increasing availability of information and better decision technology has enabled firms to have greater understanding and control over switching costs, raising the ability of firms to manage switching costs. This paper presents a formal definition of switching costs, surveys the literature on information technology and switching costs, and discusses various ways firms may use to influence consumer switching costs. A framework for managing switching costs and customer retention is also provided along with a measurement framework for estimating the extent of customer lock-in.