Thursday, March 8, 2018

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.

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