So, to find out how you can apply the concept of switching cost strategically and how to prevent your consumers from switching, you first need to understand what it is that makes them switch so you can avoid exactly that. At the same time, if you want to monitor your competitors you also need to consider how much they would invest to make consumers switch from your business to their business. And we're now going to assess these questions based on two simple formulas. But let's just recap. What are the two questions we're interested in? Two questions at first: when will a consumer switch to a new supplier? And second, how much should a supplier invest to make the consumers switch? So, how do we think about these two issues? Well, the utility, the benefit that a consumer gets from switching to a new supplier, basically consists of three parts. First of all, there's an utility increase from switching, so obviously the new product has to be better, the new service has to be better than the previous service. So, this will be some positive deltas, a positive increase from switching. Second however, that's going to be reduced by the fact that you incur switching costs as a user. So, the customer incurs some switching cost that is going to reduce the utility increase from switching. And thirdly, firms often give you some sort of goody. Some sort of special deal, special offer, special benefit if you switch and that's the "G". So, taking this equality, under which circumstances will a consumer actually switch? He's going to switch if the switching cost, C, is lower than the sum of the utility increase from switching plus the goody that you receive from the new supplier. So, this is basically the inequality that says: if the switching costs are lower than this sum, people are going to switch. So, let's look at this in a short question. So, if your consumers' utility increase from switching is actually smaller than the sum of the switching costs and the goody received from the new supplier, then the consumer will decide to switch suppliers. True or false? Good, so this was looking at the whole problem from the consumer's point of view. How much is it going to take to get a consumer to switch. Let's now have a look at the supplier's point of view. What are the profits for the new supplier from getting someone to switch? So, we typically use "pi" as the symbol for profits. So, profits for the new supplier basically consist of the profit increase from the new consumer, that's again the delta. So, you have a difference between not having this consumer and now having him in your network, having acquired this consumer. The supplier's switching costs. These are basically the costs that you have to incur to make the consumer switch, right? So, these could be advertising costs, marketing costs, product development costs and so on. Anything that makes the consumer want to switch. And finally as I mentioned from the consumer's point of view a new supplier has the option of giving a goody to the new consumer. However, of course the goody here enters negatively meaning that it lowers the profit because you as the supplier have to spend money, you have to spend time, effort an so on, to give the goody to the consumer. Whereas, on the other side, it's something that goes directly positively into the consumer's utility because he gets the goody. Now looking at this, again, from the supplier's side, how much will a supplier invest to make a consumer switch? Well, again taking the three symbols that we looked at, the three components we looked at, he's going to invest, if the investment cost of of getting the consumer to switch is lower than the profit increase from the new cosumer minus the switching goody that you give to the new consumer. So, let's have another in-video quiz. And I'll see you back in one second. Okay, so you now know at what point consumers are willing to switch. And how much your competitors would want to invest to make your consumers theirs. Let's now use this information strategically in the next video. [BLANK]
