The Razor/Razorblade business model owes its name to one King Gillette, founder of the eponymous razor-blade 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.
What is the Razor Blade or Razor Model
Gillette reasoned 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. Although some consider him an adoptive father of the model, he was the entrepreneur who developed the idea of selling the razors themselves cheap, capitalizing on the repeat business of replaceable blades.
King (his given name) Gillette made an absolute fortune from his business model. He broke down the initial sale into the parts, deconstructing the idea of a consumer only buying a good product once. What he did was make a cheap product that was disposable. This allowed for two things to happen. First, the consumer would not mind that they had to replace blades since they were cheap to being with and provided good value. Secondly. the model itself would hook users on the product, ingraining the buy, dispose, then replace model as routine. This led to lifetime users of the product.
How the Model Has Evolved
Over the years, 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 (a loss-leader) — that is complemented by another product for which the consumer is required to make repeated purchases. A recent example of this practice involves cable and satellite companies giving away DVR devices to customers and then charging those customers monthly subscription fees to use the DVRs.
A company doesn't need to 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 would later make up for these losses by offering online gaming subscriptions, software licensing agreements, and most recently with in-game purchases. In this way, the two companies still managed to exploit the Razor/Razorblade model — generating profits from loyal, repeat consumers.
Problems with the Model
The concept is similar to the "freemium" model in which digital products and services (such as games, apps, email, file storage or messaging) are given away for free with the expectation of making money later on upgraded services or added features. Video game companies like Electronic Arts (EA) and Blizzard Entertainment have taken the model however and pushed it beyond the acceptable use of the model, charging users for additional packs or quests that many video gamers believe should be included in the original price.
This kind of business practice has been perceived as some as gouging and perpetuates an atmosphere of distrust within the consuming community. This leads consumers to take their purchases elsewhere where they are receiving more perceived value, and in turn, the companies are not able to build desirable brand loyalty within their target demographic.