The Gurus on Wall Street can talk to you all day about standard deviation, upside ratios, and r-squared. However, they balk when asked about a company's competitive advantage.
This week I will talk about the third competitive advantage identified by Howard Helmer, author of the book "7 Powers: The Foundations of Business Strategy" which has helped the best companies in the world obtain market dominance.
Switching Costs: A Real-World Example with Intuit
Have you ever used Credit Karma to check your credit score, TurboTax to file your taxes, QuickBooks to manage your business' books, Mint to get a complete view of your finances, or Mailchimp to maintain an email list?
These are all popular products and services from Intuit, a company that has built a strong market position by leveraging switching costs. Switching costs are the costs and inconveniences that customers incur when they switch to a new product or service.
Here are some of the things that might run through your head while contemplating switching away from one of Intuit's products:
8 Signs of Switching Costs
- It's expensive
- Time intensive
- It may not work
- Too many customer touchpoints
- No viable alternative
- Razor and blade dynamic
- Disruption to operations
- Long upgrade cycles
Intuit long understood the power of switching costs. They knew that the complexity and hassle of switching accounting systems would create a sticky customer base. They used their recurring revenue to acquire companies in adjacent verticals, such as TurboTax, Mint, and Credit Karma. This allowed them to sync data between their products and offer customers a seamless experience.
For example, if you use QuickBooks to manage your business's books, you can easily import that data into TurboTax to file your taxes. This convenience makes it much less likely that you will switch to a competitor, even if there is a cheaper alternative available.
Intuit has further strengthened its competitive position by making it difficult for customers to switch away from its products. For example, if you decide to switch from QuickBooks to another accounting software, you will need to manually enter all of your data into the new system. This can be a time-consuming and error-prone process.
As a result of its switching cost strategy, Intuit is able to charge premium prices for its products and services. Customers are less likely to switch to a competitor, even if there is a cheaper alternative available.
Switching costs are one of the strongest forms of competitive advantage available. Intuit is not the only business to benefit from this advantage. If there are any other businesses that benefit from switching costs that you recognize.. Reach out and let me know! I would love to hear about it.