Managing Lock-In

1. 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

2. Lock-In Strategy for Buyer Bargain before you become locked in Keeping your options open Buyer’s checklist

3. 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 …

4. 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.)

5. Buyer’s checklist • Bargain for initial sweetner • Don’t 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

6. Lock-In Strategy for Seller • Investing in on Installed Base • Encouraging customer entrenchment • Leveraging your installed base

7. 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

8. 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

9. Structuring the life-cycle deal • Assure customers that they will not be in your power in the future • Don’t do a tricky business such as promising “openness” • Be explicit

10. High market shares don’t 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)

11. Attracting buyers with high switching costs • They are likely to be locked into a rival’s 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

12. 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

13. 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 manufacturer’s research grant or conference in Hawaii

14. 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

15. Loyalty programs and cumulative discounts • Reward available only to customers who remained loyal • Cost-effective customer tracing • United Airline’s Mileage Plus Program - Preferential treatment - Bonus credits • Will turn conventional market into lock-in markets

16. 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

17. Selling access to your installed base • Don’t waste an installed base • Cross-marketing • American Online

18. Setting differential prices to achieve lock-in • How price to your Installed base, rival’s 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”

19. 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

20. 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

21. 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

22. My lesson from this long story • Buyer’s best strategy is not opposite to seller’s best strategy • Don’t believe Einstein’s “I never think of the future- it comes soon enough” • Do Strategic thinking or take the “Game Theory” class

23. 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