The Razor and Blades Business Model was developed and popularized by the founder of Gillette, King Camp Gillette. He had a clear vision of how he wanted the market to work for him, stating that he could manipulate it through the said business model. But what is the Razor and Blades Model exactly, and how did this business model change how the market works?
The term “The Razor and Blades Business Model” refers to a product sold at a low cost or given away for free to increase sales of a complementary product. Low-cost printers, for example, only accept expensive refill cartridges.
The Smart Pricing Tactic
The razor-razorblade model is a pricing strategy in which a dependent good is sold at a loss or cost, and a paired consumable good generates profits.
The pricing and marketing strategy, also known as a razor and blades business model, is intended to generate consistent, recurring income by tying a consumer to a platform or proprietary tool for an extended period of time. It is frequently used with consumable goods like razors and their proprietary blades.
The idea is similar to the freemium model, in which digital products and services are. For example, email, games, or messaging are given away for free with the expectation of later making money on upgraded services or added features. (Source: Investopedia)
The Razor-Razorblade Business Model
If you’ve ever bought razors and replacement blades, you’re familiar with this business model. The razor handles are almost free, but the replacement blades are not. This strategy was popularized in the early 1900s by King Camp Gillette, who invented the disposable safety razor and founded the company that bears his name. Today, Gillette and its parent company, Procter & Gamble, profit from the strategy.
Competition is the most serious threat to the razor and blade business model. Companies may thus try to keep their consumable monopoly and thus their margin by preventing competitors from selling products that compete with their durable goods. For example, computer printer manufacturers will make it difficult to use third-party ink cartridges, and razor manufacturers will make it difficult to use cheaper generic blade refills with their razors.
Firms can use trademarks, patents, and contracts to stifle competition long enough to become an industry leaders. Keurig is a good example of a company that took advantage of this model by forbidding competitors from selling complementary products. They held a patent on K-cup coffee pods until 2012, resulting in substantial profits and skyrocketing stock prices. After the patent expired, competitors flooded the market with their own version of the K-cup, eroding Keurig’s profits and market share.
If a competitor offers a comparable consumable product at a lower price, the original company’s product sales suffer, and its margin shrinks. Gillette lowered the prices of their razors and blades in 2018 after years of price increases that led to complaints that their razor blades were too expensive and in response to subscription-based clubs stepping in with competitive products at a lower price. (Source: Investopedia)
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