A:

The Razor/Razorblade business model owes its name to one King Gillette, founder of the eponymous razorblade company. The story goes that Gillette's idea for creating disposable razors stemmed from his personal experience with a straight razor so worn it was rendered useless. Gillette reasoned - and rightly so - that if he could offer consumers a sturdy, permanent razor supplemented by cheap, easily replaceable blades, he could corner the men's facial grooming market and create a massive, repeat customer base.

In modern times, the Razor/Razorblade model has evolved to mean any business practice in which a company offers a one-time product - usually at little or no cost (see loss leader) - that is complemented by another product for which the consumer is required to make repeated purchases. Perhaps the most recent contemporary example of this practice involves cable companies giving away DVR devices to customers and then charging those customers monthly subscription fees to use the DVRs.

However, a company need not give away products to adhere to the Razor/Razorblade model. For example, during the first few years of manufacturing "Next Generation" video game consoles, both Sony and Microsoft would sell their products at a significant loss. They then would make up for these losses by offering online gaming subscriptions and software licensing agreements. In this way, the two companies still managed to exploit the Razor/Razorblade model - generating profits from loyal, repeat consumers.

This question was answered by Justin Bynum.

RELATED FAQS
  1. How do subscription business models work?

    Understand how a subscription business model works and why companies prefer a subscription business model over a traditional ... Read Answer >>
  2. What is the difference between financial forecasting and financial modelling?

    Understand the difference between financial forecasting and financial modeling, and learn why a company should conduct both ... Read Answer >>
  3. Is good customer service something to look for in a company in which I am considering ...

    Learn about the importance of customer service when deciding whether to invest in a stock. Good customer service can ensure ... Read Answer >>
  4. What is the average return on equity for a company in the electronics sector?

    Learn about the Black-Scholes option pricing model and the binomial options model, and understand the advantages of the binomial ... Read Answer >>
  5. What are some examples of different corporate governance systems across the world?

    Read about the three major types of corporate governance systems: the Japanese model, the Anglo-Saxon model and the continental ... Read Answer >>
Related Articles
  1. Investing

    Warren Buffett's Best Buys

    The Oracle of Omaha's "Rip van Winkle" approach has served him well. Read on to learn more.
  2. Investing

    Razor Wars Continue: Gillette Cut by Old-Time Rival

    P&G, Edgewell and Unilever fight over a shrinking razor market with on-demand and online services.
  3. Investing

    Procter & Gamble Adds Defendants to Razor Lawsuit

    Consumer products giant Procter & Gamble (NYSE: PG) must be getting nicked by discounted razors, because it has broadened its lawsuit against Dollar Shave Club to include other manufacturers ...
  4. Trading

    Razor Wars: Gillette Vs. Harry's Vs. Dollar Shave Club

    Discover how the Dollar Shave Club, Harry's and Gillette Shaving Club compare, and find out about the different subscription options of each.
  5. Investing

    Procter & Gamble Is Losing Shelf Space Clout

    The battle for the bathroom rages on, and Procter & Gamble (NYSE: PG) is getting washed out. A report by Bloomberg Intelligence cites market research data from IRI showing the personal care ...
  6. Insights

    Products That Cost More To Make Than To Buy

    These products aren't profitable for companies in themselves - but in some way, they still make money. Read on to find out how.
  7. Investing

    Power Up Your Portfolio With Video Game Stocks

    Level up your winnings by investing in this fast-paced, highly skilled industry.
  8. Investing

    Activist Peltz's Trian Makes Big Bet on P&G

    Nelson Peltz's substantial investment in P&G could help the company make overdue acquisitions, as well as speed up cost-cutting.
  9. Investing

    Consumer Staples Disappoint This Week

    Two of the world's largest consumer products companies have seen shares slip on mixed results.
  10. Investing

    Understanding Financial Models

    A financial model is a representation of some aspects of a firm or given security. It uses historical numbers to create calculations that inform financial recommendations or predict future financial ...
RELATED TERMS
  1. Razor-Razorblade Model

    A business tactic involving the sale of dependent goods for different ...
  2. Loss Leader Strategy

    A business strategy in which a business offers a product or service ...
  3. Versioning

    A business practice in which a company produces different models ...
  4. Repeat Sales

    A purchase made by a consumer that replaces a previous purchase ...
  5. Stochastic Modeling

    A method of financial modeling in which one or more variables ...
  6. Financial Modeling

    The process by which a firm constructs a financial representation ...
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  3. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
  4. Interest Rate Swap

    An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for ...
  5. Custodian

    A financial institution that holds customers' securities for safekeeping so as to minimize the risk of their theft or loss. ...
  6. Supply Chain

    The network created amongst different companies producing, handling and/or distributing a specific product. Specifically, ...
Trading Center