When was the last time you changed the account opening bank?
If there is no accident, your answer must be: “It has been a while.” However, on this issue, you are not special. Many people like to “lay” in a bank. If you ask bankers, you will find that the average deposit replacement rate is only 15%, which means that the average deposit time of each customer in a bank is 6 to 7 years.
Speaking of this, you may ask: has it been this long? In the final analysis, currency is also a commodity, and bank accounts are not much different in performance. So, as a commodity, to find a higher interest rate and a lower handling fee, why don’t people change the account opening bank frequently? You know, many people would rather drive a few more miles to refuel, just to be able to buy 5 cents per gallon cheaper gasoline, and only save $1-2 on the last run. But the interest and handling fees of the bank account are not calculated in points, and they can be much more than the fuel saved by running to a remote gas station.
What is the reason?
Of course, the answer is simple. The conversion cost of going to a gas station a little further away is just an extra few minutes, and that’s all. In addition, you are also very clear: this is the only cost that needs to be spent, because gasoline is gasoline, and there is no other mystery. But switching bank accounts is not that simple. Not only do you need to go to a new account bank to fill out a lot of forms, you may also need to adjust existing direct deposits or implement different transfer procedures. Therefore, the known cost is more than a few minutes. The key is that unknown costs may occur at any time. For example, if there are delays or deviations in transferring money to a new bank, your salary will not necessarily be “run”, or you will not be able to pay your electricity bill on time.
I dare to say now, you must understand why the bank is the bank note printer. In the United States, the average return on assets of the banking industry is about 15%, and such a profit rate obviously makes other industries unmatched. Although the reasons behind are varied, the most important reason is that whenever the account opening bank is replaced, the customer has to bear a large conversion cost. To put it simply, transferring bank accounts is a painful memory, so no one will do it often. Of course the bank also knows. As a result, the bank thought hard to use the psychology of customers’ unwillingness to leave, and racked their brains in order to lower interest rates or charge fees. If replacing an account opening bank is as easy as running from one gas station to another, the bank will not be able to make these small ideas.
We can see that the conversion cost is also a very valuable competitive advantage, because as long as the customer does not go to the competitor, the company can squeeze a little more oil from the customer. The customer saves from company A’s product to company B’s productMoney is lower than the cost of the conversion, and the difference between them is the conversion cost.
Unless you are enjoying a product in person, such as a bank account, it is difficult for companies that benefit from conversion costs to realize its existence, because only if they look at it from the customer’s point of view, they can really realize the cost and The difference between returns. Similarly, as with any other competitive advantage, switching costs will strengthen or weaken over time.
We can start with a very familiar software company, which is Intuit, which makes QuickBooks (financial software) and TurboTax (tax payment software). Intuit’s return on capital has exceeded 30% for eight consecutive years, and its two flagship products have dominated more than 75% of its market share with its strong competitiveness. During this period, they repeatedly beat their competitors and acquired their core chain stores. Many of them are giants like Microsoft. Like the banks mentioned above, on the surface, this seems a bit surprising. Software technology changes rapidly. Therefore, relying on the high performance of the software itself does not seem to be enough to keep opponents out of the way, and Microsoft has never seemed to be soft-hearted when it comes to competition with competitors. The mystery lies in the conversion cost.
Easy operation and a series of software versions to adapt to different customers and other strategic decisions really benefit Intuit, but the most fundamental reason why they can maintain a huge market share in the two main products is Once the door is changed, users of QuickBooks and TurboTax will have to bear huge conversion costs.
If you run a small business and have entered all of the company’s data into QuickBooks, then simply transferring this data to another software will take a lot of time. The value of these hours is not negligible, especially for a small company owner who has several jobs. Even if other software has data input functions, customers have to be patient to proofread, because information is the lifeline of the financial status of small businesses. Therefore, the cost of time cannot be ignored.
When you switch bank accounts, you will worry about whether your account is messed up. Similarly, when the boss of a small business imports data from QuickBooks into other software, it will risk losing important financial data or in the transfer process. There is a danger of archiving errors in. If you cannot tolerate the failure to pay gas bills in time due to account errors, then imagine: What if the little boss did not have cash on hand to pay employees because the billing process did not pass the invoice to the customer? What about a situation?
So, how to explain the conversion income? Maybe the competitor’s accounting software is really cheap, or has itSome features not available in QuickBook. But the basic principles of accounting today are after all 500 years old. Therefore, no new financial software can bring revolutionary changes to the accounting methods of these small businesses. Weighing the pros and cons, it is difficult to find that the conversion benefits can exceed the conversion costs. This is why Intuit has been able to cross the market for many years, and we can believe that it is entirely possible for them to continue their rule.
Intuit’s TurboTax software tells us the same story, the only difference is: it is said that because the software has less personal data, and the tax code (tax code, refers to the numeric code of the tax-exempt portion of employee income, it determines The tax exemption limit in income is set by the tax authority.) The annual change is not large, which makes its conversion cost slightly lower, thereby reducing the barriers for potential competitors to enter the market. But any competitive product should first be easy to use, cheap, or fully functional. Only then can it convince users who have a headache to learn the new tax declaration process to buy. Most people don’t like to file tax returns on their own. Why should they waste time learning new tax return procedures?
Lip and tooth dependence
Intuit is a classic case that illustrates the coexistence of multiple conversion costs. You may think that this is a company that benefits from full penetration into the customer’s business. Small businesses are inseparable from QuickBooks because QuickBooks has become an indispensable part of their daily business. Getting rid of QuickBooks and re-enabling a brand new financial software will not only cost you money but may also bring risks.
This is probably the most common conversion cost, which occurs in various companies. Take Oracle Software Corporation as an example. As a software giant, many large companies are using their large databases for data storage and recovery. Since the data in the original state is basically useless, the Oracle database usually needs to be shared with other software for analyzing, reporting, and manipulating the original data. Think about the product you just bought online-the original data of this product may be stored in Oracle’s database, but other programs can integrate these data and display the web page where you purchased this item.
Therefore, if a company wants to convert Oracle’s database to another database sold by its competitors, it must not only transfer all the data from the old database to the new database without errors, but also to transfer the new database’s database. Various programs are re-bound. There is no doubt that this is a costly and time-consuming task, not to mention hidden risks-if the problem is converted, it will cause an irreparable huge operationBig loss. Therefore, if a company is to pay a huge price to abandon the Oracle database and install other databases, the latter must be superior (or cheaper) in performance.
The company that manufactures data processing and security monitoring software is exactly the same as Oracle. Fiserv and State Street Corporation mainly produce back-end data processing software for banks and fund managers. These software require a lot of data processing and recording to ensure the smooth operation of banks and asset management companies. This requires them to work with Customer business is closely connected. Continuous and stable cooperation makes their annual income show the same characteristics. Therefore, they boast that they can retain more than 95% of their old customers every year, so it’s not a fuss. In essence, a considerable portion of their income has an annuity Amount) nature.
Now, let’s imagine again: if the balance of the bank’s financial system is uneven at night, or if the customer of a large asset management company receives the report and finds that the asset quotation is incorrect, how much confusion and panic . Coupled with the unpleasantness caused by the failure of the background processing program, in this case, the risk of switching costs may exceed any consideration of money or time. For these data processing software companies, the biggest challenge is not short-term profit, but to expand sales, because all customers are reluctant to give up the existing property guardian or data processor.
Of course, this type of competitive advantage is not limited to service companies and software companies. For example, a small aviation machinery manufacturing company called “Precision Castparts” produces high-tech super-strong metal parts specifically for aircraft engines and power plant turbines. First of all, we close our eyes and think about how much users can tolerate product failures. In a power plant, the weight of a steam turbine may exceed 200 tons, and the speed of rotation reaches 3000 revolutions per minute-what happens if the blades of the turbine are broken? Of course, the jet fell from a height of 30,000 feet… not to mention the consequences.
Therefore, it should not be difficult for elaborate casting companies to cooperate with some customers for more than 30 years. In fact, their engineers often work with customers, such as participating in the design of new products of General Electric. We may wish to analyze the cost-benefit problem. If the fine casting company maintains its quality standards at all times, GE’s only benefit from changing to a new supplier may be the cost of supply. In this way, after other suppliers replace the fine casting company, GE can manufacture turbines and aircraft engines at a lower cost, which can obtain greater profit margins.
So, what about the cost? The direct cost cannot be ignored—new suppliers first need to spend some time understanding GE products, but fine casting companies do not, but in this example, the most real cost is risk. The allowable failure rate of turbines or aircraft engines is extremely limited, therefore,