Friday, January 29, 2010

Why Do Online Firms Let Customers Get Away?

One of my professors described the concept of lock-in in a recent blog post as such:
This seems to me well explained by the standard econ concept of lock-in, where the costs of switching rise with the tenure of a relation.  Before you form a relation, you want to project high switching costs, while once you are locked in, you want to project low switching costs.
In many situations, customers are forced into keeping existing relationships with companies because it's too much of a hassle to switch. Cable companies can lure customers away with great introductory rates, but many will be reluctant to switch when the rates reset, as it means wasting yet another day waiting for a different cable guy to show up. A recent college graduate can be lured to a new job with a high starting salary, but once he's put down roots and enrolled his children at the local schools, it will be hard for him to leave for a different job in protest against meager annual raises.

While this certainly is not true of all of them, many online firms behave the opposite, making it extremely easy for customers to leave. You can set Gmail to automatically forward all incoming mail to another address, which requires effort from Google's servers without any chance at earning advertising revenue if you never have to log in again. If I want to ditch Blogger or WordPress, there are options to export the entire blog, including comments, elsewhere (WordPress even extols its users to "go easy on it," as the process is very "resource intensive"). However, my friend points out that your links to prior posts will no longer go to the right place, nor will links throughout the Web to your old material.

The above-mentioned products, unlike the offline examples cited in the first paragraph, are not things that you pay for, but your increased use of them results in more profit for the companies in the form of advertising or brand building. So why are they making it so easy to leave, sometimes at great expense to themselves?

The classic lock-in dynamic isn't quite the same for ad-supported online products. The cable company wants to attract you with low rates and then lock you in with high rate when you are reluctant to switch. An employer might want to attract you with a high starting salary but then offer you paltry raises when you've committed yourself to the company (noted, however, that you could retaliate by working less diligently). But for ad-supported products, I would think that an ad impression to a frequent visitor of the site would count just as much as one to a first-timer (though sites that require log-ins will be able to target the established user better and thus charge higher ad rates).

The offline examples also involve more substantial fixed costs. Recruiting, hiring, and training a new employee is costly, as is moving to a new city to take a job, so it's not in either party's interest to constantly be threatening each other and trying to renegotiate. With a free blog or an e-mail address, the stakes are lower, and Google doesn't have much incentive to hold hostage an e-mail account you're never going to check anyway (and it may even generate goodwill and your use of its other products if it makes it easy to leave).

For both online services I've mentioned, exporting all of your content can serve another purpose: backup. However, the big online players already do extensive online backups, and service outages are extremely rare, so any effort by the user is likely redundant and a waste of the server's resources.

Lastly, if some customers know early on that they will have a way out, they'll be more likely to try a new e-mail host. Yet signing up for an account takes minutes, and it's unlikely that most people would even think to research it, and the vast majority will never care.


Adam Gurri said...

On your last point: the vast majority will never care, but in the end it's the marginal users that services must compete for, as with everything.

An interesting related story that this always reminds me of is George Selgin describing free banking in Scotland (back in the 18th and 19th centuries). In that system, each bank printed its own currency that could be exchanged for a certain amount of gold.

To begin with the big banks wouldn't accept the currency of the newer, smaller banks because they wanted to shut them out of the competition. But then they found that the smaller banks were accepting their notes, and then bringing them in to redeem for the big banks' gold, while not accepting the little banks' currency meant that they couldn't get any gold back. So eventually they were forced to accept the smaller banks' currency too.

Basically, the big banks wanted to lock everyone into their own currency, but the constraints of the system made it impossible. I'm not sure if I explained it well, but the ability to move blogs around to different platforms always makes me think of that.

Greg said...

I see your point about the banks, and it's an interesting example, though absent with the online firms is the idea of redeeming anything of arbitrary value (in your example, paper) for something of common value (gold).

Adam Gurri said...

Yeah, the gold provides a visible constraint. An interesting question would be what would happen if banks just made their own fiat currency, not redeemable in anything--would that ultimately produce the same outcome? My instinct says yes, but I don't have any concrete reasoning behind it.

Josh said...

In the era of free online services, I wonder if the analogy with paid services that employ lock-in techniques is apt. I may purchase a cell phone and accompanying plan based on the features/price at the outset, but once I'm in that plan the company can employ strong lock-in techniques to keep me there for the duration of the contract, e.g., cancellation fees. If yours and competing services are free, however, "lock-in" becomes more of a feature-constrained idea, i.e., "I'll stick with Google Mail because they offer the most online storage space and a robust set of customization options."