vendor-lockin

Vendor Lock-in In A Nutshell

  • Vendor lock-in refers to any measure a company implements to dissuade customers from migrating away from its products or services.
  • Real-world consumer examples of vendor lock-in include brands such as Apple, Lexmark, and Keurig. More generally speaking, DSLR and cordless tool manufacturers also lock their customers into proprietary systems.
  • Avoiding vendor lock-in may involve evaluating the market and the vendor before doing business, reading the contractual fine print, and clarifying whether an exit plan or migration support is available.

Understanding vendor lock-in

Vendor lock-in refers to any measure a company implements to dissuade customers from migrating away from its products or services.

For the customer, vendor lock-in occurs when the cost of switching to another service provider is prohibitively expensive. In addition to the financial cost, the customer may also be “locked in” because of an insufficient workforce, contractual restraints, or the need to avoid operational interruptions.

Consider the example of an office that hires a vendor to install 20 spring water stations, with each station only compatible with bottles the vendor sells. Now consider what would happen if employees found the spring water to be of poor quality. 

Switching to a new vendor (with different sized bottles) would require each station to be replaced. Since this is a cost that the company cannot absorb, it is effectively forced to endure the less palatable water or remove the stations entirely. Here, the deliberate measure by the water company is a station whose unique dimensions mean it cannot dispense water from a competitor’s product

Other examples of vendor lock-in

Here are some real-world consumer examples of vendor lock-in at work:

  1. Apple iTunes – in the early days of iTunes, consumers who purchased music in the iTunes store could only play it on Apple brand products such as the iPod. Each file was encoded in a proprietary format to ensure the music was kept in the company’s ecosystem.
  2. Ink manufacturers – printer ink is a lucrative business, and many ink manufacturers warn customers that any use of a non-branded ink will void the printer’s warranty. Lexmark is one brand that asks its customers to enter a 12-digit code to verify the authenticity of each toner cartridge. 
  3. Coffee pods – branded coffee pods, such as those offered by Keurig, are only compatible with Keurig coffee machines. The company has remained a source of vendor lock-in despite partnerships between other companies in the industry to standardize the size of different pods.
  4. DSLR lenses – while adapters are available in limited situations, a photographer with a Nikon DSLR camera will not be able to mount a Canon lens, and vice versa. This locks the customer into whatever branded lenses are available.
  5. Cordless tools – with cordless, battery-powered tools becoming increasingly popular, some brands manufacture batteries that will only fit their products. This includes battery recharger systems.

How can vendor lock-in be avoided?

For consumers and business customers alike, there are several ways vendor lock-in can be avoided:

  • Evaluate the market and the provider – it’s important to perform some prior market research to understand the various solutions and how they compare. Choosing a vendor that does not have a history of vendor lock-in saves a lot of pain later. Customer reviews can be an effective way to scrutinize a company’s past behavior in this regard.
  • Read the fine print – for subscription-based services like cloud computing, the client should search the fine print for the auto-renew clause. Many vendors will auto-renew a contract unless otherwise instructed, meaning the business misses an opportunity to move elsewhere at no cost.
  • Ask questions – before entering into an agreement, it can also be helpful to ask the vendor questions. What would an exit plan look like? Does it provide migration tools, support, and other services to facilitate a smooth transition to another product?

Read alsoBusiness Strategy, Examples, Case Studies, And Tools

Related Business Model Types

Platform Business Model

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A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

Marketplace Business Model

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Network Effects

network-effects
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

B2B2C

b2b2c-business-model
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

Crowdsourcing Business Model

crowdsourcing
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Open Source vs. Freemium

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Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

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The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Franchising Business Model

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In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

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