Why companies with overpriced, outdated products often have the most market share (feat. Salesforce)

How do so many businesses co-exist in competitive markets like B2B SaaS, marketing agencies, cafes, etc?

Switching costs are used by most businesses (with or without realising it) - as one of the top ways to retain customers.

Obviously switching costs are greater the more valuable your product.

But even with an undifferentiated product, in a competitive market, it's still possible to keep customers from moving to objectively better products. These extra special switching costs fall into 3 categories:

1. Financial (termination and setup fees)
2. Procedural (time and effort learning and integrating a new process)
3. Relational (loss of business relationships, discomfort moving away from familiarity, risk of uncertainty)

Note: it’s unethical and foolish to artificially maximise switching costs. This can really backfire, burning prospective customers and souring churned customers.

The best switching costs?

- When switching costs are a natural byproduct of the product's functionality, they are more likely to be accepted by customers. Focusing on enhancing features that inherently create switching costs can be a strategic move.

- The more a customer has invested into a new product by integrating their data and logic, the stronger the switching costs. Paradoxically, products that allow easy data export and integration prevent customers from holding back, and lead them to commit more to a new product.

- Switching costs increase with the number of people who rely on the product. Large organisations are much less likely to switch to new products.

Once you rely on Salesforce’s CRM, it’s difficult to justify switching platforms. It can take months to retrain your workforce and costs hundreds of thousands or even tens of millions of dollars to recreate business logic on a new platform, even if it’s better.

If customers don't want to move, existing customers are essentially willing to pay higher prices for the same product.

For competitors to take market share they need to be radically better, or compensate customers to switch.

Even then, incentivising a customer to switch is often futile. Lower prices and coupons are proven ways to incentivise customers to switch. But lower prices are rarely sustainable. Customers only develop minor intent to repurchase the new brand, and may go back to the original.