Recognizing & Managing Lock-In Chapter 5 & 6 Information Rules November 17, 2018 CMIS-520

Classifications of Lock-In EXAMPLES: Contractual commitments Durable purchases Brand-specific training Specialized suppliers Loyalty programs November 17, 2018 CMIS-520

Contractual Commitments Contract to buy from specific supplier Requirements contract Minimum order-size commitment Evergreen contract Switching Costs- damages for breach of contract Anticipate future switching costs November 17, 2018 CMIS-520

Durable Purchases Purchase of expensive, durable equipment Switching costs depend on depreciation Rent/lease vs. buy Technology lock-in vs. vendor lock-in November 17, 2018 CMIS-520

Brand-Specific Training Customers Customer is locked-in when considerable additional time and effort would be required to learn a new brand of product. Switching costs tend to rise with time, as personnel become more familiar with existing system. Beneficial to customer when priority is to standardize equipment by using a single vendor. Example: Airline companies bought new aircraft from single company (Boeing) for “fleet commonality” November 17, 2018 CMIS-520

Brand-Specific Training Suppliers Maintain high switching costs by offering enhanced capabilities in exchange for additional learning time. Other suppliers can break into a market by imitating existing brands or developing easy-to-learn product. Example: Borland Quattro Pro, Microsoft Word November 17, 2018 CMIS-520

Specialized Suppliers When buyers purchase specialized equipment over a period of time Choices today determine needs for tomorrow Choosing one supplier will cause dependency Comparable alternatives not available Examples of Specialized Supplier Situations Department of Defense NASA November 17, 2018 CMIS-520

Specialized Suppliers Procurement Strategies Get a variety of commitments from the supplier before awarding the contract Use “Dual Sourcing” Dual Sourcing Process of keeping multiple lines of sources available Advantages are for the customer IBM and Intel case November 17, 2018 CMIS-520

Loyalty Programs Artificial Lock-in thru a companies strategic marketing—technology company or otherwise Promotions and incentives to keep a customer loyal to one vendor Technology makes it easier to track a consumers buying habits and brand preferences Loyalty programs will become more popular in the age of the educated consumer November 17, 2018 CMIS-520

Examples of Loyalty Programs Frequent flier miles Buy X amount and get the next free Hotels--stay 2 nights get the third free Volume Discounts Exclusivity Discounts Introductory Discounts Switching Discounts Referral Bonuses November 17, 2018 CMIS-520

The Lock-in Cycle November 17, 2018 CMIS-520

Brand Selection Sampling Entry point of the cycle Customer chooses new or different brand No preference based on lock-in Sampling Use of the new brand Not at a contract level Customer advantage Supplier dangers November 17, 2018 CMIS-520

Entrenchment Lock-in Complete brand preference Complementary investments Switching costs begin to rise Lock-in High level of entrenchment Switching costs now prohibit change Return to brand selection stage follows November 17, 2018 CMIS-520

Lock-In Strategy Lock-In Strategy for Buyers Bargaining before you become locked in Keeping your options open Buyer’s checklist Lock-In Strategy for Sellers Investing in an installed base Encouraging customer entrenchment Leveraging your installed base November 17, 2018 CMIS-520

Customers Three basic lessons for purchasers of information systems and technology Bargain hard Pursue open systems or other options Look Ahead November 17, 2018 CMIS-520

Buyer’s Checklist Bargain for initial sweeteners, such as discounts or support for switching from your previous system. Don’t be too anxious. Convey the impression that your benefits from switching are small and the costs large. Depict yourself as an attractive customer down the road, because of either your own future purchases or you ability to influence other purchasers. November 17, 2018 CMIS-520

Buyer’s Checklist Seek protection from monopolistic exploitation down the road, but beware of vague promises offering such protection. Keep your options open via second sourcing. Partial switching is a way to gain leverage in negotiation. Watch out for creeping lock-in, and retain information about usage records. November 17, 2018 CMIS-520

Sellers: Investing in an Installed Base Perfect Scenario Superior Technology Natural Lock in Must work to obtain lock Look Ahead at Whole Lock In Cycle Fighting for New Customers November 17, 2018 CMIS-520

Look Ahead at Whole Lock-In Cycle Static View Estimating Value Switching costs + competitive advantage Technological barriers Inconvenience Old supplier New supplier November 17, 2018 CMIS-520

Market Share vs. High Switching Cost High Market Share does Not Imply High Switching Cost Correct Analysis of Switching Cost Critical Rivals Often Design Products to Reduce Switching Costs Examples Hewlett Packard Printers Netscape vs. Explorer November 17, 2018 CMIS-520

IE Losing Market Share? Internet Explorer FireFox / Moz Netscape 2005 69.7 23.3 1.4 2004 84.1 8.2 2.4 2003 84.6 4.0 2002 86.8 -- 7.9 November 17, 2018 CMIS-520

Loyalty Programs & Cumulative Discounts Key: Reward past loyalty and must be available only to continued loyalty. Airline Mileage Programs Preferential seating Upgrades Special service phone numbers Hotel and car rental partnerships November 17, 2018 CMIS-520

Volume Discounts Favorable terms for each purchase to frequent customers. Require: Tracking individual customer purchases Establishing accounts for each customer Maintaining a balance of some credits associated with frequent buying Examples: Target, Old Navy Discounts Special Offers November 17, 2018 CMIS-520

Trends with Increasing Loyalty Programs Customers will bear higher switching costs. Consumer loyalty is likely to grow. Companies that are best at attracting and retaining customers will edge out competition. AA first frequent flier program in 1982 Consumer price sensitivity will be reduced. Rivals will imitate successful programs. November 17, 2018 CMIS-520

Leveraging Your Installed Base Selling Complementary 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 The third key strategy for sellers dealing with lock-in is Leveraging Your Installed Base. QUESTION: Based on the readings what are some of the methods that a seller can leverage their installed base? November 17, 2018 CMIS-520

Setting Differential Prices to Achieve Lock-In You want to set different prices for different types of customers Who should get the better deal, your loyal customer or the new customer? Track customer’s historical purchase patterns Tailor your offerings to these histories We know that from Chapter 2, that you want to set different prices for different types of customers. But the question is who should get the better deal, your loyal customer or the new customers. We also learned in Chapter 2, one of the great benefits of keeping track of customer information is the enhanced ability this gives you to tailor packages of products and prices to individual customers. Tracking customer’s historical purchase patterns and tailoring your offerings to these histories very much fits this pattern. QUESTION: But how should your offerings vary with customers’ purchase histories? <CLICK> November 17, 2018 CMIS-520

Controlling Cycle Length Cycle length depends on several factors: Duration of contractual commitments Lifetime of durable equipment Presence of complementary products with different economic lifetimes that work together Aggressiveness of outside suppliers Information outsiders have about the extent and timing of lock-in by various customers Frequency with which customers choose to bear the costs of putting their business up to bid Cycle length depends on several factors: Duration of contractual commitments Lifetime of durable equipment Presence of complementary products with different economic lifetimes that work together Aggressiveness of outside suppliers Information outsiders have about the extent and timing of lock-in by various customers Frequency with which customers choose to bear the costs of putting their business up to bid November 17, 2018 CMIS-520

Summary for Buyers Bargain hard before you are locked in for concessions in exchange for putting yourself in a vulnerable position. Pursue strategies like second sourcing and open systems to minimize the extent of your lock-in Look ahead to the next time you’ll be picking a vendor, and take steps at the outset to improve your bargaining position at that time. If you can’t avoid lock-in, at least get paid a sweetener up front to compensate you for becoming locked in. Even if you must make investments in a particular technology, you can still plan ahead to avoid becoming beholden to a single supplier. Retain information on your relationship with the seller, such as maintenance records, and use patterns that could reduce costs if you have to switch to a new supplier. These will be valuable assets if you decide to break off your relationship. November 17, 2018 CMIS-520

Summary for Sellers Be prepared to invest to build an installed base through promotions and by offering up-front discounts Cultivate influential buyers and buyers with high switching costs Design your products and your pricing to get your customers to invest in your technology, thereby raising their own switching costs. Maximize the value of your installed base by selling your customers complementary products and by selling access to your installed base You can’t succeed in competitive lock-in markets without making these investments. These are your most profitable customers. Employ a loyalty program to make your product attractive to your customers at their next brand selection point. This requires keeping records of customers’ cumulative purchases. An installed base is a wonderful springboard for marketing new products, especially because of your access to information about customers’ historical purchases that you have gathered over time. November 17, 2018 CMIS-520

Questions? November 17, 2018 CMIS-520