switching costs

In creativity, learning, product management, productivity by Jay Clouse

As I’ve met more entrepreneurs who sell physical products, I’ve learned more and more about the process of manufacturing.

In case it’s new to you, let me give you a quick example. Let’s say you wanted to create a mixer bottle (shoutout to the Columbus-made Titan Mixer Bottle — no affiliation, just love the product).

To have the product manufactured, you need to have “tooling” created for the product. That can include molds, fixtures, gauges, etc. If it’s plastic, tooling may include a mold that is the shape of a finished component of the product (the lid, a lever, etc.).

Creating the tooling is actually one of the most expensive parts of the process — but once it’s created and available, you can use that tooling to make a very high volume of units using that specific tooling at very low incremental costs.

If you wanted to purchase inventory of your bottles, you’ll receive volume discounts (e.g. it may cost you $1/unit for 500 units but only $0.50/unit if you purchase 2,000 units). Since the tooling has already been created, and manufacturing additional units adds a very small incremental cost, there is efficiency in manufacturing a large volume of units.

Conversely, if you only wanted to manufacture a few units, that’s actually very expensive to manufacture per-unit due to tooling and switching costs.

Switching costs are a lot like opportunity costs. If I’m producing bottles, and someone needs me to change the tooling on my machine to produce funnels instead, the time and effort it takes to change the tooling is time that could be spent manufacturing other bottles that can be sold. Instead, there is no product or revenue generated in that time.

This is why minimum order quantities exist and why manufacturing has a high cost to entry, and why costs per unit can be drastically reduced at a high volume. If the machine is already running and creating the units, it’s cheap to keep creating incremental units.

Zooming back out — our brains work the same way.

Imagine you’re working on something, maybe writing a week’s newsletters in a day (ahem) and you see your phone light up, or you have a thought about the copy on your website. To change your context and thinking from the current project to the next requires retooling — and with that comes a switching cost.

While you’re changing your line of thinking, you’ve stopped “producing” the previous project. The time it takes you to get acclimated to the new context is an opportunity cost.

And to take the analogy even further, if you are doing something for the first time (learning a WordPress framework or putting an email automation in place) you have to create the tooling first (your own understanding). This can be expensive (in terms of time) but once it’s created, it’s easy to leverage over and over.

This is why we truly aren’t good at multitasking, as much as we want to believe we are.

So to produce at your highest level, you must learn to batch your tasks and avoid switching costs.


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