This week, my ECONS101 class covered pricing and business strategy, and one aspect of that is customer lock-in. Customer lock-in occurs when customers find it difficult (costly) to change once they have started purchasing a particular good or service. The seller can then profit by increasing the price for their locked-in customers, or by selling them complementary goods or services.
There are lots of examples of customer lock-in (once you know what to look for). Any time a customer finds it difficult (or costly) to switch, then they are to some extent locked in. Think of mobile phone contracts, where there is a termination fee that constitutes a switching cost. However, the switching cost need not be monetary. Most people don't switch often between Apple and Windows computers, or between Apple and Android phones, or between GMail and Outlook, because of the cost of learning the new system, transferring files and photos and contacts, etc.
As another example, consider this article (possibly paywalled) from the Washington Post last month:
Allison Puca, 41, a project manager in Bethesda, Md., started her journey to become a single mother by choice in 2019 after dreaming of being a mother her whole life.
She underwent four intrauterine insemination attempts using sperm from two donors.
After doing one in vitro fertilization cycle during the coronavirus pandemic, Puca was able to get four embryos. She now has a 16-month-old daughter.
She spent about $10,000 on donor sperm from a total of four donors.
After her fertility treatments, Puca says she was spending $50 per month to keep one vial of donor sperm frozen and another $60 per month to keep her three remaining embryos frozen. “My rates were just going up and up,” she said.
Puca is debating whether to give her daughter a sibling, and is not considering destroying or donating her embryos. But in March 2023, she decided to discard a vial of sperm she spent $1,200 on.
There was a $15 online notary fee to discard the sperm, Puca said. “It was just like salt to a wound, in a sense. I had paid so much already. It felt like nonsense,” she said.
She lamented opaque and inconsistent pricing around storage costs. “You just feel chained,” she said. “They have your genetics, and they can just throw them away if you don’t pay. It’s like you don’t have control.”
Once a prospective parent has frozen embryos (or eggs, or sperm) at a facility, they must keep paying the monthly storage costs in order to keep them viable. They can't simply pick them up and store them at home. They are locked in, for as long as they hope to become a future parent. There are several other examples in the article.
This is likely to be a highly profitable situation for the storage facility to be in. Their customers could (in theory) transfer their frozen embryos to a competing facility, but that is both costly and risky. So, once stored in one location, they will tend to be kept there. The facility then has a locked-in customer paying storage fees.
It would be interesting to know if storage facilities offer some form of inducement to attract new customers. For example, they could offer the first three months of storage for free. That would be an example of multi-period pricing - setting the price initially low, then profiting later from the locked-in customer by having a higher regular price. That wouldn't surprise me at all, but it isn't mentioned in the article (and a casual Google search didn't turn up anything like that). However, most storage facilities are attached to IVF clinics, and that industry is quite profitable so perhaps there isn't a need to try and extract additional profits by attracting storage customers from other facilities. At the margin though, it might be something we would expect to see.
In any case, locked-in customers provide a key source of additional profits, and this is another example.
[HT: Marginal Revolution]
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