Locking your customers in for more business.

This strategy is quite simple. The more you can lock customers in for repeat business the better your company will do.

Let’s start with a high profile example of this growth strategy. Marissa Meyer took over as CEO of Yahoo roughly two years ago back in 2012. Since then Yahoo has acquired 37 companies and counting. Her strategy is to keep adding various services from mobile technologies such as Aviate, to social media such as Tumblr, in order to keep Yahoo users coming back on a daily basis. By creating lock-in Mayer is increasing Yahoo’s value to advertisers which is where the real revenue comes from. If a company allows a situation wherein customers have to go elsewhere for an important product or service there is an increased risk of losing them permanently.

Since it’s far cheaper to generate repeat business from existing customers (even if it’s just return visits) than it is to win new ones, both online and offline businesses do their best to keep the former coming back for more. Moreover, when you lock a customer into your product or service it also serves to lock competitors out. (Readers of Harvard’s Michael Porter will be reminded of “barriers to entry.”)

For these reasons finding a means of locking in customers is extremely important. There are numerous methods for achieving this objective. Here are just a few:

• loyalty programs which reward repeat buyers (e.g., an airline’s “frequent flyers plan”),
• high switching costs such as provided by Yahoo’s customized interfaces. By the time a user has customized her Yahoo interface to only display the news, sports, weather, and stock reports of interest, she’s invested so much time that it is unlikely she will migrate to another portal site.
• proprietary technology: Amazon’s famed one-click shopping cart system is another example of a lock-in. Consumers are reluctant to buy at other sites once they have an account to use at Amazon because of the ease of its one-click purchasing technology.
• a wide selection of products and services that all but eliminate the need to go elsewhere.

This same growth strategy is used by small businesses all the time. It begins with understanding one’s customers and identifying which additional services and products they will be interested in. Some of these can be supplied by third parties and simply resold to the customer base. For other situations it will make more sense to acquire the product and service, as Yahoo is doing, for maximum control as well as to shut others out.

The lockin growth strategy

For the sake of example, a company providing commercial building maintenance services could grow by expanding into the security guard sector. If it has a strong reputation among its commercial maintenance customers and then informs them that it has acquired a guard service firm with experienced management and personnel in place, it stands a strong chance of winning their business over time especially if it offers discounts to whose who buy the entire bundle of services. The alternative strategy of building a guard service from scratch will most likely not be as advantageous for entry into the new space due to the company’s lack of experience. It will take longer and potential customers may view its startup status as being too risky to rely upon.

How to Identify Complementarities for Lockin

Since no company or individual buys just one thing, there are endless market opportunities in identifying complementary products and services which could be sold to them.

Think of complementarities as synergistic combinations of goods with other goods, goods with services, or services with services. Oftentimes new value can be created simply by juxtaposing existing products and services in new combinations. Complementarities come in both vertical and horizontal categories. For example, an after sales service plan is a vertical complementarity while one-stop shopping is an example of a horizontal complementarity.

The logic behind complementarities often lies in offsetting any revenue stream weaknesses associated with a particular good or service. For example, if a company’s primary product is a one sale (non-recurring) item, it makes sense to establish a recurring revenue stream around it with other products and services, if possible. The classic “Gillette Business Model” is a prime example of this. Gillette sells the razor at near cost but makes a handsome profit on the recurring sale of its blades.

Once a complementary is identified the question becomes do you buy the supplier or merely resell their offering?

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