In an article for LSE Business Review, associate professor at EMLV business school Dan Prud’homme analyses a new model that is helping businesses lock in customers and achieve longer market dominance.
With digitisation now across all sectors, focus is shifting towards new business models that are allowing digital businesses to leverage the high costs for consumers to switch platforms.
Digital Businesses and Strategies
As industry boundaries are reshaped by digitisation, firms are developing more continuous partnerships with stakeholders.
Strategically responding to the new digital landscape requires rethinking how digital business models can most securely lock-in customers. I argue that, when coupled with other foundational digital strategies, leveraging the digital switching costs outlined in what I call the “Digital Lock-in/VEIF Model” can relatively securely lock-in customers and therefore offer prolonged market dominance.
Digital Network Effects vs. Digital Switching Costs
Network effects is when a product or service gains additional value as more people use it and can have multiple consequences, one that was highlighted by Dan was the Switching Costs, defined as moving from one supplier to another. Both create lock-in effects leading to a noticeable competitive advantage. Switching costs and network effects are two distinctive concepts but that also go together hand in hand especially since not every network effect generates the same value. In fact, in many scenarios, “it is possible for a digital network to grow while the costs of switching networks remains very low”, so digital network effects are no longer the only factor to analyse, which leads to the following point.
The Digital Lock-in/VEIF model, and Market Dominance
The Digital Lock-in/VEIF model outlines two main types of digital switching costs that should be used simultaneously to guarantee customers lock-in:
- Valuable data embeddedness
- Data switching barriers
It’s important for businesses to apply the VEIF model to ensure the next step in customer loyalty, avoid losses, and ultimately achieve market dominance; however, the VEIF on its own is not enough and can’t be used by all types of businesses, and when applicable, should be combined with a validated revenue-generation model suited to each firm’s digital products/services.
By following the model and timely rolling out complementary products/services and pursuing other smart digital strategies, a digital business should be able to relatively securely lock-in customers, helping it achieve prolonged market dominance.
Dan Prud’homme is an an associate professor at EMLV Business School (Paris, France) and non-resident research associate at Duke University’s Kunshan, China campus. Prior to joining academia, he worked in the private sector in Beijing and Shanghai, China. Dan holds a PhD from Macquarie Graduate School of Management (Sydney, Australia) and graduate degrees in law and public policy.