Managing Lock-In Slides borrowed from Carl Shapiro, Hal R. Varian & modified By: Amine Benjelloun Sumanth Mallipeddi

Introduction Strategies  For buyers  For sellers Precautions  For buyers  For sellers

Lock -IN Buyer: Hard to switch Seller: Loyal Customer Here is a good and loyal customer !!!

Basic Strategies For Buyers Bargain for initial sweeteners Large switching costs  large compensation Look as an attractive customer now and in the future Appear as an influential customer

Precautions For Buyers Keep your options open  Dual sourcing to prevent monopoly  Demand compensation for each step Watch out for creeping lock-in  Ex: Medical file Be wary of vague commitments & partial contracts  Quality of service (response time …)

Basic Strategy Of Sellers Invest Entrench Lock-In leverage

Invest Try to build an installed base of customers Looking ahead at the lock-in cycle High market shares don't imply high switching costs Selling to Influential customer Multiplayer Strategies

Installed Base Design products and promotions to attract customers  Ex: cellular service providers, photo printer Look for the cost effective way of investing

Look Ahead In Lock-In Cycle Calculate customer value over whole cycle Break down the analysis by type of customer  Ex: Old & New in Telecommunication field Perfect Competition  Competition forces you to invest in discounts to get consumers locked-in Quasi Profit  Ex: Kodak

High Market Shares Don't Imply High Switching Costs Ex:  Netscape vs. IE Low market share can still mean large lock-in  Computer Associates

Selling To Influential Customer Quantity of benefits that are resulted  Intel, Nike Influencing a part of company may lead to more sales in the rest of the parts too  Ex: Apple IPod

Multiplayer Strategies Decision maker and payer  Frequent flyer miles Buyers of complements  Razors and blades  Printers and cartridges  Subsidize the far-sighted group, tax the short-sighted group

Entrenchment Entrenchment by design Loyalty programs and cumulative discounts

Entrenchment By Design Lengthen and strengthen the cycle Expand the installed base Offer value-added services to deepen the relationship with the customers  Ex: Pharmaceutical companies

Loyalty Programs And Cumulative Discounts Loyalty programs will turn conventional markets into lock-in markets.  Ex: United Airline‘s Mileage program, Amazon referral program (Computer Associates)Computer Associates

Leverage Selling Complimentary Products Selling Access To Your Installed Base Setting Differential Prices To Achieve Lock- In Attempts To Raise Search Costs Exploiting First –Mover Advantage Controlling Cycle Length

Selling Complimentary Products Strategy adopted to win lock-in markets Sell products that are complimentary to your installed product base Customer enjoys One-Stop shopping.  Ex: IPod complementary productsIPod complementary products

Selling Access To Your Installed Base Installed base is terrible thing to waste You can get more by selling your customers information to other parties.  Ex: AOL, Hospitals

Setting Differential Prices To Achieve Lock-In Based on  Installed Base  Rival’s Installed Base  New customers Prices aimed at locked-in customers may not appeal to new buyers  Versioning

Attempts To Raise Search Costs Make yourself easy to find and your rivals hard to find.  Ex: Bargain finder Make product unique, cut down the prices, market differentiated products rather than banning the comparison

Exploiting First Mover Advantage Always have long lasting in lock-in markets Entering into multiyear contracts with key customers  Ex: Ticket Master Stagger termination dates on different customer contracts to keep rivals from achieving scale economies  Ex: Cicadas in jungle

Controlling Cycle Length Depends on  Duration of Contractual agreements  lifetime of durable agreement  Presence of complimentary products  Information your rivals have regarding the various contracts you have with your customers Get your customers to extend their contracts before they expire.  Seller side: try pre-emptive renewal  Buyer side: try to synchronize  Example: Cellular companies

Discussion Questions Do you support giving out the access to your customers to other online merchants? If so, what precautions should be needed? Say you are Sony, as a direct competitor to Apple, what steps would you take to enter the market with a new music player to attack the IPod? Imagine you are Apple, what steps would you take to hold your existing customers and to attract the rival’s as well as the new customers?