We are wired by nature to conserve energy. Energy conservation helped the chances of survival of our ancestors — the hunter gatherers. The brain consumes about 25% of our energy. Decision making is energy dissipative while performing routine tasks are not. Therefore, we are wired to prefer routine tasks over decision making.

Cooks cater to your specific palate. Your palate is different from somebody else’s. To get your cook to cater to that specific palate takes a lot of training, feedback and effort. All of the above are time and energy dissipative. Once you train them, you automatically seek a routine which is energy conservative. As a result, cooks stay employed at 3x the salary of maids and 3x the tenure of a maid and enjoys better bargaining power vis-a-vis you.

Banks are like cooks. Or at least they want to be like your cooks rather than your maids. They want you to link all your monthly payments to their accounts and offer to give you one consolidated statement each month. They even offer to automate it for you, so that things can go on routinely for you. Routines mean energy conservation, something your internal wiring likes. My intuition is that accounts that have automated payments are more likely to stay active and transact more often. Accounts without monthly payments tend to be a case of out of sight and out of mind.

Lets hypothetically say, you wanted to close your bank account. You would first have to go to each of your automated payments and redirect them to another account. Some of these don’t happen instantaneously and may take up to a month; others may need some follow ups. All of these are highly energy dissipative.

So, Cooks and Banks have high switching costs. Even when their service quality deteriorates, we’d rather stick with them than switch. In our everyday life, there are a number of such companies that offer products or services which take away the pain of decision making.

Here are some examples of companies without switching costs. In other words, you could just substitute them for their competitor and you wouldn’t know the difference.

> Telecom service providers like Airtel, Jio, Vodafone

> Airlines like Indigo, Jet, Spicejet

> Retailers like Flipkart, Amazon non-prime, Snapdeal, Big Bazaar

And here are some examples of companies that create high switching costs for their customers:

> IT services companies like Infosys, TCS, Wipro, Accenture

> DTH service providers like Tata Sky, Airtel, DishTV

> The Apple and Google ecosystems

> Retail services like Amazon Prime, Netflix

> Enterprise Software like SAP, Microsoft, Oracle

> Consumer tech like Google Drive, Dropbox, Facebook, WhatsApp

> Habit forming products like Coffee and Tea

> Neighborhood Gyms and Libraries

The 2nd category of companies make decision making a routine for their customers. As investors, we like to search and own companies that offer high switching costs. High switching costs mean higher customer retention, lower costs and higher profits. Profits can be reinvested to provide better quality of services which can in turn mean higher switching costs. Follow the trail of higher switching costs and you will usually end up with a growing and profitable companies.