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

2. Classifications of Lock-In
EXAMPLES:
Contractual commitments
Durable purchases
Brand-specific training
Specialized suppliers
Loyalty programs
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3. 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
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CMIS-520

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

5. 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”
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CMIS-520

6. 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
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CMIS-520

7. 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
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CMIS-520

8. 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
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CMIS-520

9. 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

10. 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
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CMIS-520

11. The Lock-in Cycle
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12. 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
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CMIS-520

13. 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

14. 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

15. Customers
Three basic lessons for purchasers of information systems and technology
Bargain hard
Pursue open systems or other options
Look Ahead
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CMIS-520

16. 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.
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CMIS-520

17. 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

18. 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

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

20. 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
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CMIS-520

21. 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
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CMIS-520

22. 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
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CMIS-520

23. 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
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CMIS-520

24. 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.
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CMIS-520

25. 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?
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CMIS-520

26. 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

27. 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
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CMIS-520

28. 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.
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CMIS-520

29. 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

30. Questions?
November 17, 2018
CMIS-520