The Bottom Line: Growing Roots

May 1, 2006
By David Shepherd
Step 4 of the “8 Steps Challenge”: Why “switching costs” are a necessary strategy to make your clients think twice about leaving.

by David Shepherd

If you took up the "8 Steps Challenge" at the beginning of this series, you've had several months to do the following:

  1. Introduce or enhance an openness to change in the way your firm does business.
  2. Take a look at which of your product/service lines are most and least profitable, and emphasize the former.
  3. Take a look at which of your clients are most and least profitable, and reduce or eliminate the latter.

I have worked with countless businesses in which these three steps have made a marked improvement in just a few months and I welcome your comments if you'd like to share some early successes (or difficulties).

Assuming that you've started working on these three steps and are moving toward a more profitable business model— offering your best products and services to your most ideal clients—it's time to work on protecting the future of your business by locking in these ideal clients for the long term.

In business school, this is known as creating "switching costs" because it literally refers to the process of making it difficult, or expensive, for your clients to leave you. In my book, Your Business Or Your Life: 8 Steps For Getting All You Want Out of BOTH, I simply call it "growing roots."

In business, roots don't grow by accident, nor through excellence alone. Large businesses spend a substantial amount of time developing switching costs. Some are as simple as volume discounts, frequent flier miles and numerous forms of buyer loyalty programs. Others are far more subtle and complicated such as the impenetrable terms and conditions of a cell phone contract. However, none of these switching costs are implemented by accident.

Smaller firms often make the mistake of believing that the quality of their customer service and the brilliance of their work will suffice. It will not. In fact, in one of the most amazing statistics I have ever seen, a study conducted by the Harvard Business Review revealed that 65 percent to 85 percent of customers who changed suppliers classified themselves as either "satisfied" or "very satisfied" at the time of their defection.

It seems that even though loyal customers are almost always satisfied, satisfied customers are not always loyal. This is even more troubling when we consider that it costs around seven times more to get a new, ideal client than to keep an existing one!

Losing an ideal client must be viewed as unacceptable by the firm trying to grow and build a sustainable business model. And, since neither the Harvard Business Review's study nor any other information I can find explains why they sometimes choose to leave, we must focus on preemptive, preventative measures.

The way to prevent these defections is to ensure that your ideal clients have more at stake than just a competitive bid or successful job. They need to have made investments during the process that won't show up on your invoices. Whether it's an emotional investment, a capital investment, or an investment of time and resources, you must ensure that your clients accumulate investments—in you—that would have to be duplicated (emotions, time, money, etc.) if they were to attempt to start up with a new provider.

That's why they're called switching costs.

Your clients must understand that while you may bid a project at $500,000 and your competitor's bid may be only $480,000, the rival firm's bid would actually be more costly because of all of the start up and learning curve costs (sunk costs) they would have to incur—again!

Even more frustrating than losing an ideal client due to the absence of switching costs is losing one that had sufficient switching costs in place … but didn't know it. In other words, it's your responsibility to not only consistently seek to increase switching costs but to also make the client aware of them.

If clients are not aware of their own investment, it won't be a factor in their decision to leave. I often make this point to designers who tell me how magnanimous they were by absorbing some fees instead of billing their client. For example, if "Jane" (the designer), only tells me about waiving the fees and forgets to tell the client— she would gain absolutely nothing for her effort. If, on the other hand, she sends the client an invoice for $600 marked "non billable as per Jane," she would create a small switching cost that would build with each similar action.

I encourage you to have a meeting with all of your employees to discuss this vital step. Business literature is filled with examples of switching costs that are as simple and often overlooked as the friendliness of the phone system—and even more often, the friendliness of the person who answers the phone.

A few other ideas to get the conversation started and to lock in your ideal clients include:

  • An annual retreat or party tha­­t has prestige and that your clients truly look forward to.
  • Technological moorings such as shared electronic calendars, shared Outlook meeting schedules, shared applications such as AutoCad, etc. w Shared artwork, sketches, samples or drawings.
  • Design competitions or other means to create a "team" out of you and your client. w Public relations such as press releases—getting your client favorable ink.
  • Special processes for job completion such as live Web cams, job binders, special reports, etc.
  • Client meetings with your team or tours of your office—complete with your client's work on the walls— to remind them of how much you (and they) have already invested in the learning curve.

This is just a start and as you come up with your own ideas, I hope you'll share them with me. The point about switching costs can be summed up with the old description of a ham and egg breakfast: while the hen was involved, the pig was committed! Use Step 4, growing roots, to make sure your ideal clients aren't just involved, but truly committed. Next month, in Step 5 of the "8 Steps Challenge," we'll look at the most powerful tool of all—one that can often double the profits of a firm in less than a year: It's called pricing and almost every firm I see gets it wrong.

  • David Shepherd is president and CEO of Designing Profits, Inc. The company is now accepting pre-registrations for its 3rd annual Business of Design Conference in Las Vegas, NV, September 7-8, 2006. For information, please visit

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