How can a company lure consumers into their ecosystem and Lock-in the consumers?

A very interesting example derived from Nespresso and Gillette. These two companies created a big pool of consumers starting from a base product and pulled out great profits from some elements consumable strictly linked with the main product. Nespresso, the coffee company, increased its profits and its success in the market associating to the base product (coffee machine) the highly-profitable pods. These pods can be sold only through Nespresso’s owned sales channels and they cannot functioned in coffee machines of different brands. In this way, Nespresso can Lock-in its consumers and avoiding the loss of profits.

Gillette, the famous company of razors, adopted the strategy of Lock-in selling the enduring parts of the system at low cost and then enjoy recurring revenue by selling the disposable parts at premium price. The company was able to make consumers affiliate to Gillette and to prevent other competitors from entering the market through patents.

The dependence path: Lock-in strategy

The ultimate objective of a firm is not only to attract customers, but to make superior profit through establishing a sustainable competitive advantage. In markets subject to network externalities, control over standards is the primary basis for competitive advantage.

Lock-in is the situation in which customers are dependent on a single manufacturer or supplier for some product (either a good or a service) and cannot move to another vendor without substantial costs and/or inconvenience.  These costs are known as switching costs and they are not only monetary costs but also timing costs needed to switch to a new option and to get know-how on it. This strategy can be considered a path dependence, so “the result of chaotic minor events that create self-enforcing processes.  Self-enforcing processes increase the costs to move to another path to a point that these costs outgrow the benefits of this other path”  as defined by Arthur’s (1994) and David’s (2000).

There are four economic characteristics that generate the increasing return and that can create a Lock-in effect:

  • supply conditions, namely large fixed costs and learning effects;
  • two are demand conditions, coordination effects and adaptive expectations.

For the success of Lock-in strategy the significance of past events, the necessity of increasing returns, the presence of coordination problems and costs derived from deviations of path are fundamental. In particular, if the switching costs increase over time, this increase may eventually be able to cause a lock-in if the costs outgrow the benefits.

A Lock-in is a local equilibrium in which the economy is evolved.

A company can implement lock-in in three different ways:

  • Legally: by writing contracts with tough termination clauses;
  • Economically: by creating strong incentives that make difficult to consumers to change companies;
  • Technologically: by creating products or process based on Lock-in effects.