• High-switching-cost traps create powerful competitive moats by making it too expensive for customers to leave.
• Enterprise software and critical infrastructure are key sectors for high-switching-cost investment opportunities.
• These companies may offer predictable revenue, strong pricing power, and durable portfolio protection.
• Digital transformation and AI adoption are accelerating customer dependency on these essential platforms.

The Golden Handcuffs: Investing in Companies You Can't Easily Leave

The Glorious Inconvenience of Switching

We have all been there. That bank account you have had since you were a teenager, the one with the terrible app and baffling customer service. You know you should switch, but the thought of redirecting all those direct debits and payments is just too much hassle. You are trapped, not by force, but by sheer, glorious inconvenience. Now, imagine that feeling magnified a thousand times, and you have the business model of some of the world’s most resilient companies.

I am talking about businesses whose products are so deeply woven into the fabric of their customers' operations that leaving is less a choice and more a corporate self-demolition project. Think of a company that has built its entire data architecture around Oracle’s databases. Switching is not just about buying new software. It is about retraining an entire workforce, migrating mountains of critical data, and praying that the whole thing does not collapse in a heap during the transition. It is like trying to change the foundations of your house while you are still living in it. The risk is simply too great, so you stay put.

A Fortress Built on Digital Foundations

This customer lock in is most potent in the world of enterprise software. Companies like SAP provide the central nervous system for vast organisations, managing everything from finance and logistics to human resources. Once a business commits to a platform like this, it is a relationship measured in decades, not years. The software becomes the company’s institutional memory, its operational rulebook. Ripping it out would be an act of profound institutional madness.

The recent, frantic rush towards digital transformation has only strengthened these fortresses. As businesses scrambled to get their operations online, they made long term commitments, often without fully realising it. They were not just buying a service, they were choosing the digital plumbing for their entire enterprise. Each new workflow integrated and every piece of data added was another bar on the cage, making escape even more difficult. This is not a weakness, it is the price of modern efficiency.

The Quiet Power of Predictable Profits

For an investor, this is where things get interesting. A company with captive customers has two beautiful things: predictable revenue and pricing power. When your customers cannot easily leave, you have a pretty good idea of what your income will look like next year, and the year after that. This kind of predictable, almost utility like income stream is what makes a basket of businesses like the High-Switching-Cost Traps so compelling to me. It is investing in inertia, which is often a far more powerful force than innovation.

This stability also gives these companies the power to nudge their prices up over time, often without much of a fuss. When the alternative is operational chaos, a modest price hike seems like a bargain. In an inflationary world, that is an incredibly valuable trait. It allows a business to protect its margins while others are being squeezed. It is not the sort of thing that makes for exciting headlines, but it might just help you sleep a little better at night. Of course, no investment is without risk, and even these giants could face disruption, but their foundations are unusually solid.

Deep Dive

Market & Opportunity

• High switching costs create competitive moats, leading to predictable revenue streams and pricing power for companies.
• The ongoing trend of digital transformation accelerates business dependency on mission-critical software and infrastructure platforms.
• Customer dependency is self-reinforcing, as each new feature or workflow integrated increases the cost of switching.
• Companies with high switching costs typically enjoy higher profit margins and stable revenue, even during economic downturns.

Key Companies

• Oracle Corp. (ORCL): Core technology is database systems that power the data architecture of enterprises. Switching is considered operationally risky and expensive.
• SAP SE (SAP): Core technology is Enterprise Resource Planning (ERP) software that manages finance, procurement, manufacturing, and human resources. The company has a customer retention rate exceeding 95%.
• International Business Machines Corp. (IBM): Core technology includes mainframe systems that power critical operations for major banks and government agencies.

Primary Risk Factors

• Regulatory scrutiny may increase if companies appear to have customers "trapped".
• Technology disruption could create new alternatives that bypass traditional switching costs.
• Severe economic downturns may force customers to cut spending, though mission-critical systems are typically the last to be cut.

Growth Catalysts

• The accelerating pace of digital transformation increases reliance on established platforms.
• The adoption of Artificial Intelligence and machine learning creates new switching costs, as models and insights do not easily transfer between platforms.
• The regulatory environment is generally supportive, focusing on preventing abuse rather than eliminating switching costs.

Investment Access

• The High-Switching-Cost Traps basket is available on the Nemo platform.
• The platform is regulated by the ADGM.
• Investments can be made through fractional shares starting from $1.
• The platform offers commission-free investing.
• All investments carry risk and you may lose money.