Switching costs

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Onetime costs facing a hotel or restaurant as it contemplates switching from one supplier’s product or service to another supplier. Such costs may include direct expenses such as a different purchase price, modification in equipment used (such as having to change the hotel linen cart configuration to accommodate the changing sizes of amenities) plus any related testing and retraining expenses (Porter, 1980). Good customer or volume discounts, generated over time by combining purchases, could be lost. Indirect costs such as creating, enhancing, or ending relationships and time factors may also be involved. For instance, it takes time for vendors to learn the finely detailed needs of their customers such as the best time of day to deliver goods or with whom to speak in order to communicate quickly and effectively. A new supplier may have a better purchasing price for its product but its ability to understand the hotel or restaurant’s operating needs may result in worse service. If switching costs are high, the hospitality firm must perceive a major benefit to change suppliers but such a benefit would have to clearly outweigh the costs involved. Otherwise, the firm would likely remain with the current supplier. If switching costs are low, the hospitality firm may more readily change suppliers.

Reference

Porter, M. E. (1980). Competitive Strategy. New York (USA): The Free press.

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