The Wall Street Journal ran an interesting story about how Apple creates a “happy trap” with its products so that once people buy-in to the Apple eco-system, they can’t move out without an acceptable amount of pain. This is called a lock-in strategy. IBM’s dominance in the computing space up till almost the end of the 1980s was a showcase of how incredibly profitable and successful this can be. Personally, I’m not a fan of the lock-in strategy. Firms like Oracle pursue this strategy aggressively in the very real hope of gaining a similar result, and they likely will. Tactically, it is brilliant, but IBM’s near failure in the late 1980s was also the result of this same strategy, which showcases that it can also be deadly to the companies that use it.
Let’s talk about the dangers of lock-in.
What really drove this home was a conversation I had with the then CMO of my division at IBM. I was an ex-internal auditor who tended to regularly question practices that seemed institutionalized, yet made no sense. One issue was the company’s tendency at the time to charge customers to fix defects in its products. The company also made promises that it had no intention of fulfilling. I argued that this would drive customers to competitors and damage one of the firm's most valuable assets—trust. The CMO looked at me much like a parent would look at an inexperienced child and explained that I didn’t understand IBM’s business model. IBM basically sold air. It had been so effective at implementing what we later called the “lock-in strategy” that customers had to buy whatever it sold them and pay whatever it wanted to charge. If you are locked in and your mission-critical systems are on the platform you are locked into, then the supplier can hold you hostage. This was what he explained to me, though he didn’t use the word “hostage.”
I walked away thinking that customers aren’t that stupid and if someone was holding me “hostage,” I’d put a significant amount of effort into ending that relationship. And, if I changed jobs, I certainly wouldn’t hook up with the company that treated me this way.
Over the years following that conversation, and largely after I left, I watched that division (i.e., IBM’s storage division) go from a market share that was in the 90 percent range to a market share much closer to 30 percent. Firms like EMC, which came in with a far more competitive strategy, picked up the losses.
The Problem with Selling Air and Cheating Husbands
The way you typically get to a position of having a dominant “locked-in” customer base is by providing an experience like Apple does with its consumer products. You take care of your customers’ end-to-end and you care about their satisfaction. The way you turn this into a liability is that you become dominant. Your revenue growth from market expansion then evaporates and, to grow revenue, you mine your now locked-in customer base, which you take for granted because they can no longer move.
This reminds me of another experience I had while working for Giga Information Group, which was later acquired by Forrester. I was at an employee event, and for some reason I’d been seated at a table with a lot of our sales reps. At that time, our head of sales believed he could sell more if he hired really attractive women, and my table companions reflected that strategy. I started talking to them, and most of them were divorced and single largely because their husbands had cheated on them. I was dumbfounded. These women were beautiful, smart and loyal, and yet almost as soon as they were married, their husbands started looking for other women on the side. One woman shared a story that she’d helped the guy’s assistant when she got pregnant out of wedlock and her fiancée had dumped her, not knowing the kid was her own husband’s. Her ex had regularly gone out with his father on double cheating dates before she divorced him.
What I later realized is that these guys, once they had locked-in their wives, then took them for granted and went after new conquests. Their promises and representations weren’t worth the air that created them and they were clearly into the hunt. In effect, they were predators and these otherwise smart, talented, beautiful women were their chosen prey. What I also learned was that these women didn’t seem to realize that a good deal of the problem was that they favored men who were like this. Both sides would have saved a ton of money and grief had they just decided to not get married in the first place—or in other words, if the women didn’t allow the guys to lock them in.
Wrapping Up: How Lock-In Could, but Doesn’t, Work
At the core of the lock-in strategy failure is the pivot from customer acquisition to customer mining. If you can prevent the pivot, then the result is happy locked-in customers and very little risk to either side. It is when the provider suddenly realizes that the only real way to grow revenue is to mine and take advantage of its own customers that the problem creeps in. This means the firm has to constantly look for ways to grow its available market—particularly when its chosen market becomes saturated—in order to grow revenue, but it must also keep focus on customer satisfaction and advocacy in areas it dominates and has lock-in.
The one advantage to competition over lock-in is that it forces firms to keep their eyes on customer satisfaction, because if they don’t, their installed base goes away. Keeping those saleswomen in mind, my personal advice is to avoid lock-in with a firm that seems excessively focused on customer acquisition, because you won’t like its end game. If you do get locked-in, then make sure the vendor doesn’t take you for granted by assuring a deeper relationship (e.g., like becoming a reference account or getting to know the CEO personally).
Rob Enderle is President and Principal Analyst of the Enderle Group, a forward-looking emerging technology advisory firm. With over 30 years’ experience in emerging technologies, he has provided regional and global companies with guidance in how to better target customer needs; create new business opportunities; anticipate technology changes; select vendors and products; and present their products in the best possible light. Rob covers the technology industry broadly. Before founding the Enderle Group, Rob was the Senior Research Fellow for Forrester Research and the Giga Information Group, and held senior positions at IBM and ROLM. Follow Rob on Twitter @enderle, on Facebook and on Google+.