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. What do you need to know to create a business model?

    Learn what a business model is, its importance and the primary elements that are needed in order to create a successful business ... 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. 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 >>
  4. 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 >>
  5. Are perfect competition models in economics useful?

    Take a look at some of the arguments made by the proponents and critics of the theory of perfect competition in contemporary ... Read Answer >>
  6. 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 >>
Related Articles
  1. 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 ...
  2. Trading

    How Dollar Shave Club Grew to a 630M Valuation

    Dollar Shave Club's rapid rise to become a major player in the razor industry.
  3. Insights

    Procter & Gamble to Cut Gillette Prices (PG)

    P&G have noticed gaps in its product pricing model, and it's working to close that gap by lowering prices.
  4. Trading

    Dollar Shave Club Review: Is It Worth It?

    Learn about the business model of the Dollar Shave Club, and find out whether the razor subscription company is a worthwhile investment.
  5. Investing

    Unilever to Buy Dollar Shave Club for $1 Billion

    Dollar Shave Club is apparently worth more than a dollar. About a billion more. Netherlands-based consumer products company Unilever (NYSE: UL) announced on Tuesday it was buying the online ...
  6. 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 ...
  7. Small Business

    What is a Business Model?

    Business model is the term for a company’s plan as to how it will earn revenue.
  8. Small Business

    Top 7 Myths About Starting A Business

    Don't let these myths stop you from reaching your entrepreneurial dreams.
  9. Tech

    When Going 'Freemium' Works for Advisors

    Here's how advisors can incorporate free services into their businesses without giving away the store or drawing skepticism among potential clients.
  10. Investing

    Unilever to Buy Dollar Shave Club (UL)

    In a surprising turn, Unilever has made a serious bid for the men's grooming market with its reported $1 billion acquisition of Dollar Shave Club.
RELATED TERMS
  1. Loss Leader Strategy

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

    A business practice in which a company produces different models ...
  3. Stochastic Modeling

    A method of financial modeling in which one or more variables ...
  4. Business Model

    The plan implemented by a company to generate revenue and make ...
  5. Fed Model

    A model thought to be used by the Federal Reserve that hypothesizes ...
  6. Multistage Dividend Discount Model

    An equity valuation model that builds on the Gordon growth model ...
Hot Definitions
  1. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  2. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  3. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  4. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  5. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  6. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
Trading Center