10: Locking in Customers
There are various practices that are used to lock-in customers so that they continue to purchase a service or reorder a product rather than switching to a competitor. Term contracts for services such as cable television and wireless phones are common examples: the customer must repurchase each month and must pay fees to cancel their contract. This is meant to add to the cost and inconvenience of switching - but more importantly to make the customer feel that they are committed so that they don't even consider switching or terminating service.
There are also switching costs to products - such as the cost of replacing a library of videotapes with DVDs when changing to a different kind of player, retraining employees when changing to a different software package, and so on. These costs are often described in terms of the money price, but there is also a psychological effort involved when it comes to consumer products. It's simply less pleasant to have to deal with a new product or a new provider, even if the cost and time involved is the same. The difference between as switching cost and a lock-in is that the latter is intentionally created by a supplier.
Likewise, there are strategic differentiations that a firm uses to entice customers to repurchase: offering a unique product or feature, selling at a lower price, having a long duration, and so on. It is arguable whether these are lock-in tactics because they give the buyer a reason to prefer their brand, but the buyer doesn't lose anything by purchasing a different brand.
There's a specific mention of the social and emotional involvement with a brand. When a customer feels a social connection to a person who provides them with service, or a social connection to other customers of the brand, this causes them to be reluctant to leave. However, unless this is set up intentionally, it is not a lock-in. And in some instances, this works against the brand (when a hairdresser leaves a salon, her customers will often follow her because their attachment to the employee is stronger than their attachment to the brand.)
Customers can also become emotionally attached to the brand itself when it becomes a part of their identity. A person who feels they are a Cadillac-driver is inclined to purchase the brand even if there is no connection to their salesman or the dealership, even if it is less suitable and more expensive than other brands. While brands covet this level of commitment and seek to foster it, it is ultimately the choice of the customer to become and remain loyal to a brand.
Evaluating Brand Attachment
The author suggests that a set of questions can be used to measure the level of commitment customers have with a given brand. While this seems arbitrary, it seems useful if the same criteria are applied to multiple brands, or multiple market segments, or the same brand over time.
For example, the author suggests adding one point if customers thin the product is "very cool" and two points if the replacement parts for the product are relatively expensive. The higher the score, the more attachment the customer feels toward the brand. A firm can use this score to seek to increase attachment over time.
Drawbacks to Lock-In
While companies may covet the opportunity to force customers to do business with them, it has some serious drawbacks - not the least of which is that customers dislike being treated in this manner and will desert for another provider when they can bear the cost of leaving and will be resistant to the idea of returning.
A second drawback is that it tends to create a stagnant company. If a firm feels it has a lock on customers, it does not see the need to be innovative in improving the product or efficient in lowering its prices. This makes the product offering unappealing to new customers.
A final drawback is that current customers will be proactive in dissuading the market: they will express their irritation to others and discourage them from doing business with a brand that takes them for granted. Before social media, it was very difficult for a person to learn such things about a domineering vendor - today, it is very easy, and younger generations of customers search the Internet before they buy to learn about a firm's reputation.
Outsourcing as Lock-In
In the B2B market, the author mentions outsourcing as a lock-in to the clients of a firm that handles certain aspects of their business. Ideally, a firm seeks to outsource because there is not enough work of a certain kind to require full-time staff, because a vendor can do the work more efficiently, or because the company wishes to escape the risk of certain operations. However, outsourcing has become something of a fad in the past few decades, such that firms outsource by default and may not even consider whether there are advantages to doing so.
Also, outsourcing is generally spoken of in terms of services, it is also germane to products - a firm that purchases packaging material from another company is saving the expense of making it in their own operation. In that sense, all goods are substitutes for services in the B2B marketplace.
Outsourcing generally places a firm at the mercy of its vendors - particularly for services, it is difficult to switch from one firm to another quickly, and the company's own performance and profitability are dependent on its vendor. (EN: This strikes me as inevitable when it comes to any good - and moreover, it's of the same nature as the political argument about developing internal industry rather than importing, which is flawed.)
Outsourcing is particularly dangerous when the services that are outsourced are among the firm's core capabilities or are contributors to competitive advantage. The vendor holds a lock on something that's extremely critical for the firm to do, and has the ability to perform the same service for its competitors. Contractual agreements are often used to prevent or discourage this, but they can seldom be effectively enforced.
The author provides a lengthy pro/con list for the practice of outsourcing - but most of it is not germane to the topic of the present book (new product innovation). In that regard, his remarks on competitive advantage (being at risk of losing it instantly and at risk that the vendor sells a "unique" capability to competitors) seem sufficient.