Jo Kim

1 February 2001

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

Lock-In Strategy for Buyer

• Bargain before you become locked in

• Keeping your options open

• Buyer’s checklist

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 …

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.)

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

Lock-In Strategy for Seller

• Investing in on Installed Base

• Encouraging customer entrenchment

• Leveraging your installed base

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

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

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

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)

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

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

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

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

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

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

Selling access to your installed base

• Don’t waste an installed base

• Cross-marketing

• American Online

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”

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

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

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

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

EndThus we may know that there are five essential for victory: (1) He will win who knows when to fight and when not to fight. (2) He will win who knows how to handle both superior and

inferior forces. (3) He will win whose army is animated by the same spirit

throughout all its ranks. (4) He will win who, prepared himself, waits to take the

enemy unprepared. (5) He will who has military capacity and is not interfered with

by the sovereign. - Sun Tzu on the Art of War