There are three common types of switching costs:
These costs exist to various degrees when an organization switches suppliers. For example, when the organization switches from using an existing computer equipment provider to a new one, the change can introduce many time-consuming and costly activities, as well as personal stress.
Switching costs are significant in a highly competitive market with a high level of consolidation; however, they are relatively low in a fragmented market with no dominant players. A market that consists of suppliers with specialized products and few substitutes would incur higher switching costs than a market with undifferentiated products and many substitutes.
Because switching costs are inevitable and can figure substantially, the rule of thumb is to resist switching or consolidating suppliers unless the cost savings from the alternative supplier are greater than the cost of switching. A TCO analysis can be leveraged when making this comparison.
The Postal Service can reduce or eliminate future switching costs early in the purchasing process through sourcing and supplier selection decisions. The Postal Service should not only invest in acquiring skilled suppliers, but also focus on retaining them through partnerships and alliances when appropriate. Standardization and compatibility of inputs and selection of flexible technologies that are easy to adapt, given that they best meet Postal Service needs, are also encouraged. Anticipating the potential exit strategy with each supplier and preparing for a possible termination in relationship far in advance will also reap considerable savings for the Postal Service.
