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 (e.g., email, games, or messaging) are given away for free with the expectation of making money later on upgraded services or added features.
Understanding the 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. King Camp Gillette, who invented the disposable safety razor and founded the company that bears his name, popularized this strategy in the early 1900s. 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. With trademarks, patents, and contracts, firms can stifle competition for a long enough time to become a leader in their industry. Keurig is a good example of a company that capitalized on this model by preventing competitors from selling complementary products. They held a patent on the K-cup coffee pods until 2012 and, as a result, enjoyed substantial profits and soaring stock prices. However, after the patent expired, competitors flooded the market with their version of the K-cup, eroding Keurig's profits and market share.
If a competitor offers a comparable consumable product at a lower price, the sales of the original company's product suffer, and their margin erodes. After years of price increases that led to complaints that their razor blades were too expensive and in response to subscription-based 'clubs' stepping in with competitive products at a lower price, Gillette lowered the price of its Mach 3 Turbo razor in January 2018.
Some firms find more success in selling consumables at cost and the accompanying durables at a high-profit margin in a tactic known as the reverse razor and blade model.
Example of a Razor-Razorblade Model
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. For example, Microsoft makes no money on the sale of its Xbox One X game console even at an average $499 price, but it gets about $7 out of each $60 video game.
Service providers often sell mobile phones below cost or give them away because they know they will make the money back over time from 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.