Gillette invented the "razor-and-blades" business model—the practice of selling a base unit product paired with a disposable product that consumers must continually purchase. It has been a core marketing strategy of the company for a century, and one that has been so spectacularly successful that it has been adopted by many other companies. Gillette was acquired by Procter & Gamble Co. (NYSE: PG) in 2005 in a stock deal valued at $54 billion (see "Acquisition Game Changers"). While P&G has continued using the razor-and-blades model, it may have to shift its strategy in the future.
What is the Razor-and-Blades Strategy?
The razor-and-blades business model is based on building up a dominant platform for a consumer product by selling the base unit (for instance, a razor handle) at a very low price or even as a loss leader, and then making profits by selling consumables (razor blades) for the product at high profit margins. Other industries have since adopted the same strategy with great success—think of computer printers and ink cartridges.
A key aspect of this strategy is that the base unit can only use consumables made by the same manufacturer (as it's made purposely incompatible with other brands). This locks the consumer in to the manufacturer's platform and allows the company to sell proprietary consumables at a high profit margin. If the base unit is compatible with consumables made by other manufacturers, the razor-and-blades model would probably be doomed to failure because consumers would buy the premium base unit and then seek out alternate, lower-priced consumables. The resulting competition would drive down prices and margins for these consumables, making it extremely difficult to recoup the low to negative margins on the base unit.
When Did Gillette Introduce the Strategy?
King Gillette, the founder of the razor giant, introduced the razor and blades model early in the 20th century. While King Gillette received two patents on razors, blades, and combinations of the two in 1904, he only introduced his famous marketing strategy in 1921. By that time, the original patents had expired.
As Randal Picker of the University of Chicago Law School points out in a 2011 piece titled "The Razors-and-Blades-Myth(s)," Gillette did not introduce its groundbreaking strategy at the best time--that would have been 1904 to 1921 when the razors were still under patent protection. During this period, Gillette set a premium price for its razor handle and held this price when the patents were in place. But after the patents expired in 1921, Picker notes that Gillette slashed the price of its old razor handle to match its competition, and concurrently introduced a new razor handle sold at a premium price. Sales of the low-priced razor handle took off. In 1921, Gillette razor sales more than doubled from the previous year to 4.25 million. Combined with the large number of razors that Gillette had sold to the U.S. military during World War I, this led to a rapid increase in its user base.
Who Else Uses the Razor-and-Blades Strategy?
The razor-and-blades strategy has been successfully employed by companies in a number of industries including the following:
- Computer printers: Printer manufacturers have become notorious for selling printers at rock-bottom prices and then charging steep prices for replacement ink cartridges. Over the years, even as printers have become more sophisticated with an increasing number of features, their prices have declined in real terms. With margins trending lower or in negative territory for printer sales, the only avenue for printer manufacturers to boost profits is by selling proprietary ink cartridges at high margins. However, inkjet cartridge refill services offered by giant retailers like Costco Wholesale Corp (NASDAQ: COST), for savings of as much as 70 percent of the cost of a proprietary cartridge, may present a threat to the long-term viability of the the business model.
- Blood-glucose meters: The blood-glucose meters that diabetics use to monitor their sugar levels are routinely given away. That’s because manufacturers can recoup the cost through the sale of proprietary test strips that patients must insert into the meter for each reading. A diabetic may use hundreds of these strips a year, depending on how many times per day he needs to check his blood glucose levels.
- Cell phones: Phone companies are willing to give away some smartphones at no charge—and the latest iPhone models at huge subsidies—as long as the consumer is willing to be locked into a multi-year contract. In this case the razor is the phone and the blades are the monthly charges on the contract. Through this arrangement, the consumer avoids paying hundreds of dollars upfront for a cell phone. At the same time, the cell phone contract gives the phone company annuity-like earnings that enable it to recover the device subsidy and make a tidy profit in the bargain.
- Entertainment devices: The razor-and-blades strategy is a very popular one in the entertainment and gaming industry. In this context, hardware such as the Kindle e-reader or gaming consoles like Sony Corp.'s (NYSE: SNE) PlayStation (PS) have emerged as the razors, and ebooks or games are the blades. While production costs for these devices are still too expensive for them to be given away free, they are typically sold at prices that generate very slim margins, if any. For example, when Sony's PS4 came out in 2013 with a retail price of $399, research firm IHS estimated that it cost $381 for the components and manufacture of each console, generating a margin of only $18 per unit. (See also "Products That Cost More To Make Than To Buy")
Procter & Gamble's Razors and Blades
Procter & Gamble is the market leader in the global blades and razors market, with a market share of approximately 70 percent. It owes most of its success in this area to the Gillette brand, which includes the Fusion, Mach3, and Venus lines. The grooming division, which also includes Braun electric razors and epilators, is the most profitable of Procter & Gamble's five global business units, accounting for 17 percent of pre-tax earnings while contributing 10 percent of sales in fiscal year 2014.
Gillette has introduced only two new razor lines in almost two decades—the Mach 3 in 1998 and the Fusion in 2006. In April 2014, the company announced the latest enhancements to its five-blade Fusion line in the form of the ProGlide FlexBall, which it billed as the first razor that moves, adjusts, and pivots to meet a the contours of a face, allowing for a cleaner shave and a better shaving experience.
Each razor line costs an estimated $750 million to develop. Assuming a similar price tag for the ProGlide FlexBall, Procter & Gamble would have to sell an astounding number of these razors—which carry a suggested retail price of $11.49 for the manual version and $12.59 for the battery-powered one—just to break even on its development costs. In addition, marketing and advertising for these products tack on hundreds of millions to the total cost.
On an interesting note, the ProGlide FlexBall uses current Fusion blades, which marks a radical departure from the time-tested strategy where new razors are incompatible with older blades.
Risks to the Strategy
Procter & Gamble's grooming division sales declined 3.7 percent to just over $8 billion in 2013, the first decline in five years, while unit volumes also fell 1 percent. In fiscal year 2014, grooming revenues fell 0.4 percent to $8 billion as unit volumes increased 1 percent. There are a number of reasons why sales of Procter & Gamble's razors and blades are slowing down.
- Growing acceptance of facial hair: Hipster beards, hirsute players in the National Hockey League playoffs, and the growing popularity of social movements like "No Shave November" and "Movember" all point to the growing acceptance of facial hair. It may be a fad that lasts for only a few years or could signal a growing change. But for now, the return of the mustache and beard after more than a century of the clean-shaven look poses a risk to the long-term growth prospects for razors and blades.
- Increasing competition: Gillette's competition is no longer restricted to No.2 Schick-Wilkinson Sword, which has been a fierce rival despite having a market share that is less than one-third that of Gillette. An increasing number of aggressive e-commerce startups and upstarts, such as the Dollar Shave Club, Harry’s, and King of Shaves, are using savvy marketing tactics and subscription-based services to capture a growing share of the market for razors.
- Possible consumer backlash against premium-priced blades: Up to now, consumers have been quite willing to pay premium prices for Gillette's blades. However, there may be a backlash building against the high prices for a product that is perceived (despite Gillette’s creative marketing) to be at base a simple commodity.
The Bottom Line
Gillette's success with the razor-and-blades strategy has spawned a host of imitators in industries as diverse as cell phones, gaming, and computer printers. But the growing acceptance of facial hair, increasing competition, and a possible consumer backlash against expensive blades may hamper its continued success.