A switching cost is a business tool that exists in nearly every consumer market. (Klemperer, 1987) Firms attempt to build competitive advantages that allow for large profits while being shielded from market share incursion. (Dhanorkar, 2012) The extremely successful business investor, Warren Buffett, originally coined the term 'moat' and subsequently applied it as a competitive advantage strategy. (Cebrzynski, 2007) The MorningStar investment company teaches that switching costs are a type of moat (2005) and investors seek them out when choosing potential investment opportunities. (Dhanorkar, 2012) This specific advantage, or moat, is very desirable from a business manager's perspective. However, these varying kinds of switching costs prevent consumers and end-users from freely utilizing products or services at their discretion. This paper will identify those switching costs that exist in a consumer market.
According to a MorningStar, Inc. investment course, switching costs are defined as "those one-time inconveniences or expenses a customer incurs in order to switch over from one product to another". (2005) They are the differing customer retention devices that are employed in similar manners to keep consumers 'locked-in' with a company. (MorningStar Inc., 2005) Several authors have classified these costs in varying manners but perhaps Burnham, Frels, and Mahajan submit the simplest and most applicable typology where they organize switching costs into three categories: Procedural, Financial, and Relational. (2003) Nearly all types of switching costs can be related to one of these three classifications.
Procedural switching costs are those costs associated with loss of time and/or effort. (Burnham, Frels, & Mahajan, 2003) Several types of switching costs fit into this category such as evaluation, installation, and translational costs. (Burnham et al.