Switching costs are everything you lose or have to redo when you change supplier, not the price of the new product.
They come in four kinds: your data, which has to be moved; your integrations, which have to be rebuilt; your people, who have to be retrained; and your processes, which grew around the old tool.
A Worked Example
The video uses round numbers. A new supplier is $20,000 a year cheaper, but moving would cost $100,000 in work and disruption. It takes five years to break even, so most customers stay.
Five years to break even, so most customers stay. Round numbers for illustration.
What Happens in AI
In AI something interesting happens. Swapping one model for another is often easy. But everything built around the model is not: the prompts, the tests, the connections to your data, the habits of your team.
This is why suppliers work so hard to become part of your workflow. The deeper a product sits in your daily work, the more expensive it is to remove, and the more pricing power the supplier holds.
What a Buyer Can Do
As a buyer, you can lower these costs in advance. Keep your data in formats you can export. Prefer open standards. And test.
The Business Engineer framework maps where each part of the AI stack sits and who holds the leverage. These pills are short lessons from the same library.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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