Recognizing & Managing Lock-In

1. Recognizing & Managing Lock-In Chapter 5 & 6 Information Rules CMIS-520

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

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 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 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” 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 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 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 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 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 CMIS-520

11. The Lock-in Cycle CMIS-520

12. 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 CMIS-520

13. 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 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 CMIS-520

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

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

21. IE Losing Market Share? 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 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 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. 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 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 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 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. 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 CMIS-520

30. Questions? CMIS-520