Recognizing Lock-In
Chapter 5
Valentina Neblitt & Tonia Graves
02/15/06
In this chapter the authors emphasize that understanding and recognizing lock-in is crucial for success in an
information economy. Recognizing lock-in is the first step towards managing lock-in. Switching costs are common
occurrences, not exceptions, in an information economy. Buyers usually bear the brunt of switching costs associated
with switching information systems. Examples of measuring switching costs, customer valuing, and recognizing
patterns of lock-in are provided in an attempt to prove true the statement that “to understand lock-in, look ahead and
reason back.”
The authors use the example of cars and Macs to show how switching costs are increased when you have made
substantial durable investments in complementary assets. The car example has low switching costs related to a lack
of substantial durable investments in complementary assets. When you are ready to change from a VW to a Subaru,
your garage is unchanged by which model is parked inside, your driving skills are easily adjusted, and you can haul
similar cargo. The investment in your complementary assets of garage, driving skills, and cargo trailer are reasonably
stable. With the Mac example; however, you have higher switching costs because you have significant durable
investments in complementary assets such as software, wetware, peripherals, and a network of peers.
The Bell Atlantic/AT&T example illustrates how large companies are suspect to lock-in. When Bell Atlantic
invested in AT&T’s proprietary digital switches, Bell Atlantic faced enormous obstacles each time Bell Atlantic
wanted to add new services or hardware. Because Bell Atlantic had such a large financial investment in AT&T’s
switches, they had to deal with AT&T’s proprietary quirks, because the cost of switching from AT&T’s switches to
something else was too large.
Total switching costs are determined by the sum of the cost incurred by the switching customer and the costs incurred
by the newly switched to company. The authors advise readers to compare switching costs to revenue on a percustomer basis in order to determine the value of an installed customer base. If you know the value of your customer
base, you know how much you should spend to today to maintain those customers and attract more customers.
Lock-in is divided into the following seven categories or patterns: contractual commitments, durable purchases,
brand-specific training, information and databases, specialized suppliers, search costs, and loyalty programs.
The main points of these categories are: Beware of contracts that guarantee price not quality, durable equipment
switching costs decrease due to depreciation, switching costs increase over time with brand-specific training, and use
standardized formats and interfaces.
These seven categories follow the lock-in cycle of brand selection>sampling>entrenchment>back to next brand
selection point. Successful strategies include understanding and anticipating all the stages of the lock-in cycle.
Questions
Why is it important to recognize lock-in?
How do you make lock-in benefit you as a customer?
How much would spend to attract customers to switch to your system or service?
Why did Subway cancel the sub club loyalty card?