Posted by Tom Grant on August 24, 2010
You might be surprised to find out how worked up I can get about an issue like switching costs (a.k.a. lock-in). It's a question worthy of at least a little emotion, since it affects the fortunes of technology companies: Under what conditions would a customer switch to a different vendor for the same product or service?
The question has returned with a vengeance with the increased adoption of SaaS and PaaS technologies. Tech vendors are happy to use the cloud as an easy way to attract customers, as long as it doesn't turn into an equally easy way to lose customers.
What gets my dander up is the simplistic, puerile way in which people sometimes discuss this issue, particularly in regard to SaaS implementations. Here are a couple of examples.
Cost Of Switching
How do the switching costs of an on-demand solution compare to an on-premise alternative? Clearly, the cost of switching from an on-demand solution is not zero, and yet you still find in some discussions of SaaS the assumption that customers will leave willy-nilly. Nor is the cost of switching the same as an on-premise solution, but you'll find people speaking about the two as if they presented the same migration and implementation challenges.
Lawson CEO Harry Debes deserves some kind of booby prize for simultaneously arguing both extremes. On the one hand, "Getting signed up as a SaaS customer is fast, but getting out is just as fast." On the other, "People lock themselves in! They see the software, like it, and want it. This is true of all professional software." Uhhh, right. No wonder Debes backpedaled a year later, making the unconvincing argument that, gosh, he was talking about SaaS as a licensing model, not a delivery mechanism. (Or, if Debes wanted to think bigger, as a business model where both licensing and delivery play a part.)
What About The Benefits?
The terminology we use to discuss this issue is ultimately misleading. No customer makes a decision purely based on costs, except in the most dire, extreme circumstances. Many vendors, hoping to be successful insurgents, have learned this lesson the hard way. Offering the same technology at half or a quarter of the cost isn't a strong incentive to switch, if you've never heard of the vendor and you have doubts about their long-term viability. On the other hand, customers are willing to lend an ear to newcomers, as long as they have something compelling to offer.
Benefits drive decisions about staying with a vendor or jumping ship, perhaps even more than cost. Considerations of cost matter only insofar as they lead to positive outcomes, beyond just lowering the monthly or yearly payment. (Colleague Liz Herbert has some interesting words to say about outcome-based pricing models that are worth heeding.)
Why Embrace The Goofiness?
If you've ever worked in the technology industry, these observations about switching costs are fairly obvious, almost to the point of being truisms. Customers are not easily distracted by bright, shiny objects, especially in the B2B world, where the calculations of business outcomes are paramount. The participants in this thread in the Forrester community reflect how people with some experience dealing with the opportunities and risks of switching talk about the issue. When you hear someone speak in the goofier, more extreme terms, it's a sure sign that they either lack experience in the technology industry, or there's something else that's impairing their professional judgment. (I can't speak to why Debes committed "one of the more bone-headed comments in the recent history of the applications software industry.")