Customer bonding is one of key forces driving strategy today. Traditional, product-centric ways to compete – on price, quality, features, etc. – are necessary, but insufficient to lock-in customer relationships. Competitors can imitate these sources of differentiation, and customers can quickly change allegiance. Companies that customize their offerings and promote customer and complementor investments in and around the product can, however, create bonds with their customers that can reduce the likelihood of switching – and drive greater margins.
Bonding is a continuum. It extends from the first loyalty a customer feels toward a product to a full lock-in with Proprietary Standards; it is most feeble with Best Product strategies and is strongest at System Lock-In. We have identified four stages in the bonding continuum: a successful Best Product strategy should generate a dominant design, Total Customer Solutions draws on customer lock-in, and System Lock-In utilizes both competitor lock-out and proprietary standards.
In this first stage, dominant design, customers are attracted to a product because of its intrinsic value – either the product’s low price and differentiated set of features or services that accompany it. In nascent industries, there is typically extensive experimentation before consolidation to a common design. The competitor generating this design captures the first element of product loyalty, as well as the benefits of first mover advantage. The bonding with a dominant design, however, is feeble. Customer loyalty is to the attributes of the product, and they quickly switch to a different provider when offered new, superior attributes.
After dominant design, the first degree of bonding is customer lock-in. Here, customers may be initially attracted to the product due to its attributes, but then are retained due to a range of externalities that are created as the customer uses the product. Self-customization and learning, along with customer-supported product innovation and “frequent purchase” programs are the primary tools for creating customer lock-in. As such, the switching costs are not infinite, but there are barriers to switching that go well beyond the product itself.
Locking out the competitor is the next step in bonding. In this instance, the company creates significant barriers for competitors trying to enter the business, and thus reduces the options for current customers to switch. There are four primary forces that contribute to competitor lock-out: restricted access to physical distribution channels (e.g. “ownership of optimal supermarket shelf space); brands that can drive their own demand, especially when coupled with restricted access (creating a self-reinforcing feedback loop); patents, with the pharmaceutical industry as the classic example; and relentless innovation that continually keeps a company’s product offering one step ahead of the competition.
Proprietary Standard is at the extreme end of the bonding continuum – reaching and sustaining this position can generate immense rewards. There are, however, significant obstacles to achieving this: not all industries offer the opportunity to establish a standard; and if so, it may not be possible to keep it proprietary; and it usually requires an industry in transformation. In this scenario, the firm must have complementors adopt its “standard”, creating a self-reinforcing feedback loop (e.g., the customers seek the standard with the most complementors, and complementors support the standard with the most customers).