Recognizing Managing LockIn Chapter 5 6 Information Rules

Recognizing & Managing Lock-In Chapter 5 & 6 Information Rules 11/23/2020 CMIS-520

Classifications of Lock-In EXAMPLES: • Contractual commitments • Durable purchases • Brand-specific training • Specialized suppliers • Loyalty programs 11/23/2020 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 11/23/2020 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 11/23/2020 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” 11/23/2020 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 11/23/2020 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 11/23/2020 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 11/23/2020 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 11/23/2020 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 11/23/2020 CMIS-520

The Lock-in Cycle 11/23/2020 CMIS-520

Brand Selection • 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 11/23/2020 CMIS-520

Entrenchment • 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 11/23/2020 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 11/23/2020 CMIS-520

Customers • Three basic lessons for purchasers of information systems and technology • Bargain hard • Pursue open systems or other options • Look Ahead 11/23/2020 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. 11/23/2020 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. 11/23/2020 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 11/23/2020 CMIS-520

Look Ahead at Whole Lock-In Cycle • Static View • Estimating Value – Switching costs + competitive advantage Inconvenience New supplier Old supplier Technological barriers 11/23/2020 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 11/23/2020 CMIS-520

IE Losing Market Share? Internet Explorer Fire. Fox / 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 11/23/2020 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 11/23/2020 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 11/23/2020 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. 11/23/2020 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 11/23/2020 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 11/23/2020 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 lockin by various customers – Frequency with which customers choose to bear the costs of putting their business up to bid 11/23/2020 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. 11/23/2020 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 11/23/2020 CMIS-520

Questions? 11/23/2020 CMIS-520