The Razor-Razorblade Business Model
The razor blade business model relies on selling an initial product at a relatively low price (the razor) — potentially below cost — followed by consumables, where the firm makes the majority of its profit.
Examples of the Razor-Razorblade business model
The most famous example of this approach — where it gets its name — is companies like Gillett selling the razor for a relatively modest price, while substantially higher margins on the consumable blades. The attempt is to get customers locked into the company’s offerings, as once this initial product is purchased, consumers are likely to continue to purchase the consumables.
Electric toothbrushes, and printer/ink cartridges
Electric toothbrushes and printers are both examples where the ongoing revenue stream associated with the sale of consumables can exceed the profit associated with the initial purchase.
Games consoles such as PlayStation and Xbox have historically been subsidized in their initial release. Although still priced at hundreds of dollars, the components in the consoles have at least historically exceeded the initial sales price. Both Microsoft and Sony relied on continued revenue through the sale of games — for each game sold, a component of the sale goes to Microsoft or Sony, in turn helping to offset the initial console subsidy.
The subsidizing of cell phones as part of phone contracts can also be regarded as an example of the razor-razorblade model. Cell phone companies have historically covered part of the initial upfront cost of phones, recouping the initial outlay over the course of the cell phone contract.
Benefits of the Razor-Razorblade Approach
Reduces customer risk of trying the product
A key benefit of this approach this business model is that it allows customers to try the products and services without a substantial upfront cost. This may allow customers who would otherwise not be willing to buy the items to commit to a small initial outlay.
Constant revenue stream from the product
The approach also allows provides a constant revenue stream for firms — potentially resulting in sales many times over the initial outlays.
Limitations to the razor-razorblade approach
The cost of any initial subsidy may not be recouped
With the razor-razorblade business model, a key risk is that you do see sufficient subsequent sales to recoup your initial expenses. If you are subsidizing the initial sale quite substantially, then you may risk making a loss if the expected consumable sales do not play out. With game consoles, for example, the initial subsidy has been hundreds of dollars — with licensing fees in the order of tens of dollars for each game sold, Microsoft and Sony are reliant on consumers purchasing tens of games over the course of their ownership to justify this initial outlay.
The low initial outlay may not encourage customer lock-in
In setting the initial price, there is a trade-off between setting the initial price low, to encourage adoption, but also not too low, which encourages customers to switch between brands. If the initial price is too high, customers are less likely to make the initial purchase (hence forgoing the possible revenue stream of consumables), but if the price is too low, there is no reason for customers to remain committed.
Another disadvantage with this approach is that customers may feel disgruntled — why does it often cost just as much for a set of ink cartridges than the printer itself? While customers may like the initial low entry price, there is a tendency to feel cheated by the high consumables price. This feeling can be further compounded by a sense of frustration associated with being locked into paying elevated prices for the consumables.
Others can launch competing commodities
A related danger that can lead to a reduction in subsequent sales is if other firms are able to launch compatible consumables. This is common with inkjet printers — given the very high margins on printer cartridges, other firms are able to offer cartridges without incurring the initial costs associated with the initial product.
One possible approach to limit imitation of consumables is if there is part of the design that can be patented. If there is something — integral to the functioning of a product that — that you are able to patent, then this may provide a basis to prevent other firms from being able to launch imitation versions. Companies can also attempt to use technology to limit the ability of compatible products from functioning (e.g., chips in cartridges), although this has the danger of amplifying customer dislike of being forced to buy official cartridges.
Modifications to the razor-razorblade business model
The freemium model is a permutation on the razor-razorblade business model — common with mobile apps. Essentially freemium gives the initial product away for free, with the hope that individuals with upgrade various components of the service.
One way that freemium typically differs from most razor-razorblade businesses is that it often only relies on a small percentage of users upgrading. While there is the hope that most people who purchase a razor or printer will go on and use consumables, only a small percentage of users spend money on freemium apps. The business model works because the cost associated with providing the service to each user (i.e., the marginal cost of each additional user) is essentially nothing. This allows developers to give away their product, relying only on the small number of users that do upgrade the service to bring in their revenue. As such, while the freemium model works well with digital content, it is less suited to items that do cost a substantial amount to produce and ship.
Another permutation on the razor-razor blade business model is subscription services. In this approach, there is not the initial purchase, but rather customers are committed to monthly purchases.
While subscription services are common across industries, the connection to the original razor-razor blade model is most apparent when considering the approach of Harry’s and Dollar Shave Club. Rather than sell a customer a razor, with the expectation that customers will then regularly buy the blades, Harry’s and Dollar Shave Club essentially give away their razors when customers subscribe to their service. The commitment to the service allows them to further subsidize the initial razor, while also helping to ensure that these customers purchase the blades.
This article was originally posted at https://startupsloth.com/the-razor-razorblade-business-model/