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The Power of Switching Costs: Why Locking In Customers Drives Long-Term Investment Success

Updated: Feb 7

Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.

 

As long-term investors, we seek stability and consistent returns. While many factors matter, one often overlooked gem is switching costthe financial or non-financial hurdles customers face when leaving a company. 


Supercharger network: Tesla has a vast and reliable network of Supercharger stations, offering significant charging convenience for Tesla owners. Switching to another brand would mean relying on a less developed charging infrastructure, potentially impacting travel and daily commute.
Supercharger network: Tesla has a vast and reliable network of Supercharger stations, offering significant charging convenience for Tesla owners.

Companies with high switching costs create sticky customer bases, translating to predictable revenue streams and have higher chances of presenting themselves as lucrative investment opportunities.

How do switching costs benefit investors?


  1. Reduced churn: Customers locked in by high switching costs are less likely to jump ship to competitors, leading to stable and predictable revenue. This stability allows companies to plan for the future, invest in growth, and ultimately, reward shareholders.

  2. Pricing power: When switching is expensive or inconvenient, companies have more leeway to set prices, potentially leading to higher profit margins. This translates to superior returns for investors.

  3. Resilience: During economic downturns, customers with high switching costs are more likely to stick around, making these companies more resilient to external shocks. This stability is invaluable for long-term investors.

Examples of companies with Switching Cost as their Economic Moat.

  • Fortinet: Renowned for its cybersecurity solutions, Fortinet benefits from high switching costs. For their existing customers to implement and integrate a new security system, it is complex and expensive, deterring them from switching. This translates to consistent revenue and a loyal customer base, making it an attractive investment for those seeking stability.

  • Tesla: While initial car costs might be higher, Tesla's extensive charging network, software updates, and brand loyalty create significant switching costs. This "lock-in" effect fuels consistent demand and future growth potential, appealing to long-term investors.

How to idenfity companies with Switching Costs as one of their Economic Moats.


You can use AI chatbots like Googlebard or BingChat as a start,

simply start by using a prompt like

I am a long-term investor, who favors companies with Switching Cost as one of their economic moat. 

Do you know if Fortinet has that?


Remember: Identifying companies with strong switching costs isn't a magic bullet. Thorough research and due diligence are crucial before making any investment decisions. However, understanding the power of switching costs can equip you to make informed choices and position your portfolio for long-term success.


Stay tuned for our next sub-blog where we'll explore another powerful economic moat!

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