What is the Razor-Razorblade Model
The razor-razorblade model is a pricing tactic in which a dependent good is sold at a loss (or at cost) and a paired consumable good generates the profits. Also known as a "razor and blades business model," the pricing and marketing strategy is designed to generate reliable, recurring income by locking a consumer onto a platform or proprietary tool for a long period. It is often employed with consumable goods, such as razors and their proprietary blades. The concept is similar to the "freemium," in which digital products and services (such as email, games or messaging) are given away for free with the expectation of making money later on upgraded services or added features.
Breaking Down Razor-Razorblade Model
If you've ever purchased razors and their matching replacement blades, you know this business method well. The razor handles are practically free, but the replacement blades are expensive. The strategy has been erroneously attributed to King Camp Gillette, who invented the disposable safety razor and founded the company that bears his name. Today, Gillette (and its parent Procter & Gamble) employs the strategy to great profit.
The biggest threat to the razor and blades business model is competition. Therefore companies may attempt to maintain their consumable monopoly (and maintain their margin) by preventing competitors from selling products that match with their durable goods. For example, computer printer manufacturers will make it difficult to use third-party ink cartridges and razor manufacturers will prevent cheaper generic blade refills from mating with their razors.
If a competitor can offer a comparable consumable product at a lower price, the sales of the original company's product will suffer and their margin will erode. After many years of price increases that led to complaints that their razor blades were too expensive, Gillette lowered the price of its Mach 3 Turbo razor in January 2018 in response to subscription-based 'clubs' that had stepped in with competitive products at a lower price.
Razor-Razorblade Model Examples
The video game industry provides another example of the razor-razorblade model pricing strategy. Game console makers have a track record of selling their devices at cost or at a low profit margin by planning to recoup the lost profits on the high-priced games, which consumers buy far more often over a long period of time. Fox example, Microsoft makes absolutely no money on the sale of its Xbox One X game console even at its $499 price, but it gets about $7 out of each $60 video game.
Mobile phones are often sold below cost or given away for free by service providers who know they will make the money back over time on recurring fees or data charges. Printers are sold at cost, a loss or at a low profit margin with the understanding that ink cartridges will provide recurring revenue.