Lock-in Strategies for Sellers

1. Lock-in Strategies for Sellers H.A.P.

2. Four Key Stages • Investigate • Invest • Entrench • Leverage

3. Investigation Cases • You are creating a Xerox copier empire and planning to make future profits on service. • What issues should you be concerned with? • What can you do to overcome these issues? • You are a small-scale service provider. How do you beat Xerox?

4. Investigate • Know your competition • Ease of aftermarket competitor entry lowering prices and switching costs (Xerox service co.s) • Company with small market share may still have a valuable franchise if customers generate ongoing revenues and are unlikely to switch • If you are a niche player: • Uniqueness • Small scale hurdle

5. Investigate • Know your customers • Segmentation • Companies with tight capital budgets • Discount equipment >>> Multi-year service contract • Accurate Predictions • Predicting DCFs from future margins on future predicted sales >>> Estimate value of each locked-in customer. • Accurate estimate of each customer’s future switching costs >>>expected revs >>> max investment you should make

6. Invest • Know how much, where, and how to build up an installed base of customers. • May require a lot of funds to have future profits. Be sure to analyze future returns accurately. (Quasi-profits)

7. Invest • Attract buyers with high switching costs • Higher investment • Influential Customers • “Total gross margin on sales to other customers that results from convincing this buyer to purchase your product.” • Multi-player Strategies • One-party who can draw attention to others • Baby formula at hospitals used by mothers at home

8. Entrenchment • The technology has arisen to begin to personalize your web surfing experience. As a manager of the on-line portion of a major retailer, would you incorporate personalization into your website? • Given the choice, would you turn on the personalization switch in your browser? • When would you want personalization?

9. Entrenchment • By design • Incorporate new features to raise switching costs • Add more value-added information services • Drug distribution companies • By programs and discounts • Rewards only for loyal customers • TRACK CUSTOMERS EFFECTIVELY

10. Leveraging • Do you think that Microsoft could potentially make more money by upgrading more often? • At what point would consumers stop buying their product? • What happens if they start necessitating OS upgrades technologically? • Why does the insanity end?

11. Leveraging • Expand complementary products beyond rival offerings • Sell access to your installed base • AOL merchant space • Could be dangerous? • Execute price discrimination opportunities

12. We know how this ends… “Suppose you are successfully building a readership for your new on-line magazine…so far most of your money has come through ad revenues…” - Information Rules

13. Leveraging • Executing first-mover advantage in… • Market with small number of key large customers • Multiyear contracts (Ticketmaster/major stadiums) • Will the Internet change this situation? • Contract driven markets • Stagger termination dates on contracts • Hard to execute for startup? • Frequency and timing of upgrades or versions

14. Book’s Conclusions • Be prepared 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 switching costs. • Maximize value of installed base by selling your customers complimentary products.

15. Hap’s Conclusions • Segment and profile your competitors and customers. • When building base understand that buyers know the game. • When instituting entrenchment and leveraging tactics understand that competitors know the game. • Traditional Principles are still key. • Product differentiation, superiority, cost leadership.

16. Hap’s Conclusions • Be careful to gauge from a customer’s perspective the appropriate level of switching costs. • Make sure you don’t to piss off your customers. They won’t buy your next product. • The book was definitely written in 1999.

17. Questions?