Great Business Ideas: Vendor lock-in

Great Small Business Ideas to Start: Vendor lock-in

Developing products that are only compatible with other products in your range shuts out competitors and ensures repeat business from customers.

The idea

Being able to devise a foolproof strategy for retaining customers and maintaining a steady, reliable stream of revenues is the dream of many corporate executives. By using vendor lock-in—ensuring customers are dependent on your products and unable to move to another vendor without substantial switching costs—you can achieve this.
Gillette’s razor-sharp business acumen exploits vendor lock-in.

Its razor blade handles are only compatible with its brand of razor blades; consequently, its razor blades are the primary source of income. Manufacturer of electronic toothbrushes Philips Sonicare also uses vendor lock-in. Its toothbrushes have an electronic base that requires a Sonicare replacement toothbrush head, ensuring customers will return to Sonicare and preventing them from switching to another manufacturer. Switching cost is the cost a consumer incurs when purchasing from a new company and is a key aspect of vendor lock-in. The higher the switching cost, the less likely a customer is to switch.

This concept is not new. Many businesses do this: printer manufacturers like Hewlett-Packard, camera companies such as Canon, coffee retailers such as Nespresso, all provide proprietary, reusable components for their products. These businesses ensure success by planning the reusable component of their products from the start. Where many attempts at vendor lock-in fail is viewing the reusable component as just an add-on. It isn’t. It is the product, the benefit for the customer, and the profit for the business.

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In practice

  • Consider selling the original product for a low, eye-catching price to stimulate sales of the add-on components.
  • Alternatively, consider making the “base product” expensive to persuade customers they have made an investment in your brand and deter them from switching to another company. The choice depends on your product, your market, and your customers. What would they value most?
  • Offer a range of add-ons compatible with the base unit. This element of choice helps overcome consumers’ fears that they are “stuck” with something of diminishing utility.
  • Be aware that demand for your products will be interrelated— if demand for one decreases, demand for the partner product will decline.
  • Switching cost is not always real—it can just be imagined by the customer. It can be enough simply to persuade your customers that it will be inconvenient or costly to switch to a new vendor.
  • Plan your vendor lock-in strategy from the start. Clearly, this strategy works best for products that need to be regularly replaced.