July 27, 2009

Locking Customers to Your Product? It’s Probably Not Good Then.

Although the world of business development partnerships can be complex, rife with epic contracts with tie-ins and promises, expirations and penalties for all parties, when relationships are struck that reduce customer choice, it is a telltale sign that the product or service being provided is well below acceptable standards. You see, customers aren’t stupid. They will be your product and company’s loudest advocates, more than willing to spread the word on your behalf, if you have a game-changing offering. But if you have to rely on bundling and exclusive contracts just to rope customers in, you probably don’t have something they want all that much anyway.

The recent flare-up of seething and complaining about the quality of AT&T, and the gnashing of teeth for Apple to shed itself of its telecom overlord partner handcuffs is only the latest example of business development contracts and exclusive rights being offered at the harm of customer choice. And any time you are forced to restrict choice, there’s obviously a reason you would – a very real threat that the alternative, your competition, is good enough to take your business away if it were to be played on an even field.

The dichotomy between how Apple’s products are much sought after and AT&T’s services are much loathed could not be more clear. Although I have yet to find a consistent voice of people who enjoy their long distance provider, AT&T’s failings are well-documented, from its frequent shoddy service, to its bungling of feature rollouts, failure to provision for peak loads, and general malfeasance. Meanwhile, in contrast, Apple’s product introductions may have fans sleeping outside their retail stores for days on end, just to say they did.

There’s a reason it’s called lock-in. Because customers are trapped. And being trapped is never a good thing.

Remember the brouhaha only a decade or so ago about how Microsoft manipulated its monopoly position, forcing OEM partners to carry its Internet Explorer browser as the default, over the largely-deemed superior Netscape Navigator? At a time when very few would have selected IE as the technology leader or feature leader, it became the market leader through brute force, trickery and customer handcuffs.

When businesses have a high-quality product, they don’t fear competition the way the mediocre guys do, but instead, compete on their merits. But when threatened, that’s when you can expect the ridiculous contracts to fly – from automated renewals and multi-year contracts, to early exit penalties. And when exclusivity is not threatened, but is instead encouraged, that is when you see a relaxed approach to improvements, and of course, a scale in prices. It’s the very reason there are anti-trust laws and precedents set to stop monopolies in their tracks.

It is one thing to compete through innovation, and quite another to compete through bundling and exclusivity. And even though Apple largely is seen as the better of the two players here, recent developments in Cupertino have us wondering if they too are becoming protective of their accrued market position. One only has to look so far as their recent quashing of Google Voice, their forcing of Google Latitude to be a broken-down Web application, and rumors are now flying that the Spotify application will also face a steep task to make it onto the iPhone, as it potentially competes against iTunes.

I don’t want to sound like a hippy-dippy free markets advocate. But if customers don’t like your product, the last thing you really want them doing is sticking around and bad-mouthing you to everyone they know. If you want to compete in the market, you should not be afraid to let your products win on their merits, on their price, and on their differentiation. If you have to instead do a backroom deal that makes you the default, and there are no other options, maybe you’ve got a lot more work to do in the R&D space instead of in BD.

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