Managing LockIn

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Managing Lock-In

There are roads which must not be followed,
armies which must be not attacked, town which
must be besieged. - Sun Tzu, The Art of War
Jo Kim 1 February 2001
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Lock-In Strategy for Buyer

• Bargain before you become locked in
• Keeping your options open
• Buyers checklist

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Bargaining before you become locked in

• Bargaining hard during initial negotiation
• Emphasizing your influence as a customer
• Your bargaining position will be weaker once you
  make sunk, supplier-specific investment
• How to get your best protection?
• Initial discount and

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Keeping your options open

• Watching out for creeping lock-in
• Why coordination within organization and
  centralization of information systems decision
  are necessary?
• Retain the right to information on your
  relationship with the seller (medical files,
  records of calling pattern, etc.)

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Buyers checklist

• Bargain for initial sweetner
• Dont be too anxious
• Depict yourself as an attractive customer
• Seek protection from monopolistic exploitation
• Keep your options open via second sourcing
• Watching out for creeping lock-in

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Lock-In Strategy for Seller

• Investing in on Installed Base
• Encouraging customer entrenchment
• Leveraging your installed base

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Looking ahead at the whole lock-in cycle

• Your lock-in customers are valuable asset
• How much to invest in attracting new customers?
• - Traditional, static accounting data has a
  limitation
• - Analysis based on type of customer

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Fighting for new customers

• What is revenue from your lock-in customers?
• The return on the investment you have made in
  them
• Product differentiation and cost leadership are
  still important

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Structuring the life-cycle deal

• Assure customers that they will not be in your
  power in the future
• Dont do a tricky business such as promising
  openness
• Be explicit

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High market shares dont imply high switching cost

• A large M/S indicates lock-in?
• Cisco Systems can continue to outface its rivals
  using an open architecture?
• Emergence of aftermarket rivals can be a danger
  who can serve without imposing significant
  switching costs (Quattro Pro attracted Lotus
  1-2-3 users)

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Attracting buyers with high switching costs

• They are likely to be locked into a rivals
  product already
• Subsidy can not be recoup when customers turn out
  to have low switching cost (long-distance
  companies)
• Buyers with growing needs(switching costs) are
  very attractive

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Selling to influential customers

• One customer can influence others
• Offering discounts to influential buyer
• Who is influential buyer?
• The total gross margin on sales is appropriate
  measure
• Influence come from perception as leader

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Multiplayer strategies

• Different combination of players can influence
  each other
• Looking for divergent interests among multiplayer
• Drive a wedge between the interests of the player
  and decision maker
• - Airline frequent-flier miles
• - Medical device manufacturers research grant
  or conference in Hawaii

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Entrenchment by design

• How to get customers entrenched?
• Deep relationship means high switching cost
• Offer more and more value-added information
  services
• Pharmaceutical drug wholesalers
• - Automated dispending and reporting systems
• - Consulting service

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Loyalty programs and cumulative discounts

• Reward available only to customers who remained
  loyal
• Cost-effective customer tracing
• United Airlines Mileage Plus Program
• - Preferential treatment
• - Bonus credits
• Will turn conventional market into lock-in markets

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Expanding the set of complementary products
beyond those offered by rivals

• Enable to capture more business and maximize the
  value of your installed base
• How Visa and MasterCard beat American Express?
• Selling complementary products and services to
  your installed base
• Selling applications software to run on Windows
  Microsoft

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Selling access to your installed base

• Dont waste an installed base
• Cross-marketing
• American Online

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Setting differential prices to achieve lock-in

• How price to your Installed base, rivals
  installed base, and new customers?
• - How to give discount?
• - Switching cost exist?
• New customer having a low willingness to pay will
  get extended discount
• Selective discounts for new customers are the
  solution to the burden of locked-in customers

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Attempts to raise search costs

• Make it easy to find you and to learn about your
  products
• Make it difficult to seek out alternatives and
  compare with those of your rivals
• Truly unique products are most important

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Exploiting first-mover advantage

• How to keep rivals from achieving scale
  economies?
• - Control the length of the lock-in cycle by
  entering into multiyear contract with large
  customers
• - Stagger the termination dates on contracts
  with different customers
• Control the frequency and timing of new version
  or upgrades

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Controlling cycle length

• Not all customer prefer a short cycle
• What are Influential factors of cycle length?
• Get your customer to extend their contracts
  before those contracts expire
• - sell new equipment or an upgrade before they
  are really needed

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My lesson from this long story

• Buyers best strategy is not opposite to sellers
  best strategy
• Dont believe Einsteins I never think of the
  future- it comes soon enough
• Do Strategic thinking or take the Game Theory
  class

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End

• Thus we may know that there are five essential
  for victory
• He will win who knows when to fight and when not
  to fight.
• He will win who knows how to handle both superior
  and inferior forces.
• He will win whose army is animated by the same
  spirit throughout all its ranks.
• He will win who, prepared himself, waits to take
  the enemy unprepared.
• He will who has military capacity and is not
  interfered with by the sovereign.
• - Sun Tzu on the
  Art of War