A firm can indeed benefit from high switching costs even when rivals offer free products, due to several key reasons:
- Customer Retention: High switching costs make it difficult and costly for customers to switch to competitors, which leads to higher customer retention despite the presence of free offerings from rivals.
- Customer Loyalty: When customers have invested significant time, money, or effort using a product, they tend to stay loyal even in the face of free alternatives because switching entails a loss or inconvenience.
- Revenue Stability: High switching costs create stable and predictable revenue streams because customers are less likely to leave for free but unfamiliar products.
- Competitive Advantage: High switching costs act as a barrier to entry for competitors. This provides the firm with pricing power and the ability to maintain profitability despite competition.
- Non-Monetary Costs: Switching costs are not always just financial but also include effort, time, learning curve, and psychological factors that discourage customers from switching.
Examples include companies like Gillette, which used product design to create switching costs by locking customers into a specific brand ecosystem, and software firms like Intuit, where extensive use and network effects create high switching costs for customers. Thus, high switching costs allow firms to maintain market power and profitability even when free products are offered by rivals, by making it inconvenient or costly for customers to leave.
