Imagine you are the CEO of a Railroad company offering public transportation for 50 € a month. You have heard rumors that a new bus company is to be founded which also covers all destinations you are servicing. A big group of your customers is expected to be willing to switch to the new bus company because it is put off by your dominant market position and previous price increases. Market research has found out that switching to another company would be worth 150 € to them. However you know that this group of customers would also be suffering from the lower comfort (which can be expressed by 100 €)
You know that the product-related switching costs of your consumers are 100 Euro. On the other hand, your consumers’ utility increase from switching to the bus company is 150 Euro.
Thus to make the benefit from switching zero (no incentive to switch at all) you have to give a goodie of 50 Euro (either in the form of a price decrease or improved services).
