Make Your Business More Valuable By Building in Switching Costs

This week we're going to look at how to make your business more valuable by building real or perceived switching costs into your business model by looking at the story of BMT Tax Depreciation.

They're an example of a company who've done a great job in building perceived switching costs into their business model, to make it more likely that their customers (who purchase very infrequently) will return to them over the long-term, rather than go to a competitor.

The Story of BMT Tax Depreciation

Over 25 years BMT Tax Depreciation built an incredible market-leading position. They now do 50% (yes half) of the property depreciation schedules in the market. They built from start-up to 180 team members.

A great story about building steadily, and smartly.

The challenge with a business model like BMTs.

Investors don't buy properties every year. In fact, those with a portfolio may only buy 3 or 4 or 5 over 10-15 years.

This makes the cost of acquiring a customer in that kind of model high, because it's transactional. Those customers aren't coming back regularly, so it's hard to hang onto them. So each year, you have to replace your revenue with entirely new customers if you don't find a way to also hang onto the older ones.

BUT...

If you can create reasons for them to never leave you, because they perceive it's too valuable to stay, or to painful to find someone else, or (ideally) a mix of the two then your cost of acquisition vs expected lifetime value of customer ratio (COA:ELV) improves.

Why is that important?

If you can increase the expected lifetime value per customer (by getting repeat purchases) whilst holding your cost of acquisition steady (or improving it) your gross margin will expand. If you keep driving them in opposite directions, you should become materially more profitable (and valuable) than your competitors over time.

So how did BMT solve that problem?

Glad you asked. They:

Created a customer portal called MyBMT

Provided the depreciation schedule through that portal

Used clever data-matching to have the portal notify you by email EVERY time there's a development approval near your investment property. Whether you have 1 property, or 10 properties - you'll get notifications forever (that you can control) even if you never buy from BMT again

How did that system make customers stickier?

Well.. what's the worst thing that could happen to your investment property?

• Someone plans to build something next door that builds out your view or aspect.
• Someone plans to build a site next door that will create lots of noise (like a nightclub or gym with booming music for example) making it hard to sell or rent
• Someone plans to build a huge apartment building next door to your two-story home so you now have 15 stories of people next door looking onto your pool or into your bedroom windows.

You get the picture. If you don't know about the development plan, you can't understand it or object to it if it's going to reduce the value of your property or make it hard to rent out.

So that info is super insightful and valuable!

And no BMT competitor was offering that level of insight to a one-off customer.

And it gave BMT a reason to stay in contact with you as a customer.

So given you get that value for life from them, and it's super useful, why would you ever go somewhere else?

BMT's value-creating MyBMT platform is an example of a switching cost.

There's no penalty for leaving BMT, but because so much value is being created by the platform, there's a perceived switching cost i.e. I'll lose something valuable to me if I switch to a competitor - so I don't.

That's great, I get it now... but how do I build switching costs into MY business model?

Brainstorm one of two ways to make your business model more sticky by building in some switching costs:

• By creating value that increases the longer they stay with you (the data, or service, or insights become more personalised, more accurate, or more valuable over time)
• By creating deeper hooks into their business or life (I don't mean by creating harsh penalties for leaving, but the more embedded you are in their business, their systems, their life... the harder you are to leave or to unseat by competitors)