Locking In Customers

by Tom Murcko
Customer lock-in (that is, their cost to switch to another provider) is an important concept in business. If lock-in is low you're less likely to be able to retain the customer, but if lock-in is thought to be high then the initial sale will be more difficult. Where switching costs are high it's easier to get a new customer than to get a customer to switch from another provider. First-mover advantages are especially powerful in markets with high lock-in.
The ability to detect switching costs and predict how they'll change as time passes is an important business skill. Some types of lock-in rise over time (called creeping lock-in), others fall. Here are some examples of each: contractual commitments (falls over time), durable purchases (falls), brand-specific training (rises), information and databases (rises), and loyalty programs (can rise or fall).
For example, as a supplier, switching costs are the key to valuing your installed base. As a buyer, show the seller you understand how you'll be locked in with them, and explain what your switching costs would be from your current vendor, and use these factors to negotiate a better deal.
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