The Unseen Drivers of Legacy Software Loyalty and Purchase Choices

Despite appearing as an unremarkable corner of the tech marketplace, PDF-based software displays perfectly how switching costs—a major construct of microeconomics—influence purchasing decisions for both businesses and consumers.

For the purposes of this article, I will define Switching Costs (SC) as one-time financial, operational, and/or psychological costs incurred by consumers in switching from one supplier or supplier type to another; SC also create a significant barrier to entry for new suppliers in a given market, thereby allowing existing suppliers to retain their customers long into the future while making it extremely difficult for the new suppliers to compete for them.

Why Rational Actors Stay Trapped

The PDF document format has become a standardised global language for document management in the public, private and healthcare industries. As governments, the private sector, and the healthcare industry adopted the PDF document format, they established their operating infrastructure, IT workflows and staff training on the version of PDF document software they used initially. This means that by the time cheaper alternatives were available, the cost to transfer to another supplier was considerably greater than the cost savings obtained by making the change. This is an example of Rational Actor Lock-In (RAL); therefore, rational actors continue to use the same product or service long after a newer, better product or service has been introduced to the market, simply because of the exceedingly high costs associated with switching suppliers. RAL is evidenced by looking at the data.

Two recurring barriers make it difficult for users to switch PDF editing software: the time required to integrate a new product into existing workflows, and the total cost of a replacement solution. This dual frustration creates a dilemma; on the one hand, users are irritated by the cost of enterprise PDF solutions, yet on the other hand, users are hesitant to abandon solutions because doing so requires much more than just finding and purchasing a new product.

When the Price of Leaving Is Too High

Legacy suppliers retain near-monopoly power through the same mechanism that prevents rivals from gaining ground: switching costs deter customers from exploring alternatives, regardless of product quality.

Companies that face high switching costs will spend less on finding alternatives than they do on established products. Also, if switching costs are greater than the added value of switching to a lower-priced product, companies will continue to pay a premium for established products indefinitely. A mid-sized firm running enterprise PDF tools across hundreds of employees will be highly sensitive to the annual cost but equally concerned about the disruption of switching products.

How Competitors Are Challenging the Lock-In

A combination of lower switching costs and a stronger value proposition is the primary strategy to eliminate lock-in; this strategy has been employed very aggressively by newer competitors. Competitive products such as UPDF Editor have targeted the financial costs and operational challenges of switching to alternatives. Users can now purchase a single-user licence that can be used across Windows, Mac, iOS, and Android. The lower costs of switching are due in large part to the reduction in platform fragmentation that previously made migration challenging.

Similarly, the value of format compatibility grows greater as the number of users increases, and the network effect has diminished to a large extent due to the accessibility of interoperability between various PDF users on multiple operating systems.

Now a $2.41 billion market, with a projected growth rate of 11.5% through 2035, the PDF market has been disrupted, and the pressure on legacy providers is growing. In addition, by embedding basic PDF editing capabilities within software users already owned, Microsoft significantly reduced the switching cost for casual users entirely.

The key lesson learned from this examination is not only that established providers are subject to competition based on price. More importantly, the ability of legacy providers to retain their market dominance over time has less to do with the product quality and more to do with the tendency towards stickiness and its impact on how difficult it is to switch from one product to another. Once this has been removed, through the use of increased levels of platform interchangeability, the comparable pricing and bundled offerings of products in the same segment will quickly erode the pricing power of the legacy provider.