The razor-razorblade model involves selling a product at a low price, maybe even at a loss, to sell a related product later for a profit. The model owes its name to King Gillette, founder of the namesake Gillette 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 facial hair 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.
- Razor-razorblade model is the process of selling one product at cost or for a loss in order to sell a paired product later for a profit.
- The model gets its name from King Gillette, who pioneered the approach by selling disposable blades.
- Makers of video game consoles sometimes sell the consoles at a loss, but then make up for the losses with software and subscription sales.
- Critics of the razor-razorblade model argue that the practice is a form of price gouging and builds distrust among the consumer community.
King (his given name) Gillette made an absolute fortune from his business model. He broke down the initial sale into parts, deconstructing the idea that a consumer only buys a good product once.
Making a cheap product that was disposable, allowed two things to happen. First, the consumer would not mind that they had to replace blades since they were cheap and provided good value. Secondly, the model itself would hook users on the product and ingrained a buy, dispose of, then replace as a 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 for using 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 the latest 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 gaming subscriptions, software-licensing agreements, and other purchases. In this way, the two companies still managed to exploit the razor-razorblade model and generate profits from loyal, repeat consumers.
Problems with the Model
The razor-razorblade 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 ActivisionBlizzard (ATVI) have taken the model, however, and pushed it even further, 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 by some as a form of price gouging and perpetuates an atmosphere of distrust within the consumer community. It can lead consumers to make 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.