A:

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. 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.

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.

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.

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.

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