Switching costs
Sector Deep DivesThe cost, in money, time or risk, a customer bears to move to a competitor, which protects incumbent pricing.
Switching costs are what makes a customer stay with a product they might not choose again from scratch: data migration, retraining staff, rewriting integrations, and the operational risk of a changeover going wrong.
They are what enterprise software sells on. A system embedded in a company's core processes is extremely hard to remove, which supports both retention and steady price increases well above inflation.
They show up quantitatively in net revenue retention and in low churn, and they are the reason a business with mediocre growth can still be extremely valuable: the revenue is durable.
They are distinct from network effects. Switching costs lock in an existing customer; network effects make the product better as others join. A business can have one without the other.
Worked example
An enterprise system costs 400,000 a year. A competitor offers the same capability for 300,000.
Migration costs 250,000 in implementation, retraining and integration rewriting, plus a real risk of disruption. The saving takes two and a half years to recover before any risk adjustment.
That gap is why the incumbent can raise prices 5% a year without losing the account, and it is what shows up quantitatively as low churn and high net revenue retention.