Razor Blade Business Model: Meaning, History, Problems (2024)

The razor-razor blade model involves selling a product at a low price and maybe even at a loss with the goal of selling 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 that was so worn down that it was rendered useless.

Key Takeaways

  • The razor-razor blade model is the process of selling one product at cost or for a loss with the goal of selling 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 through software and subscription sales.
  • Critics of the razor-razor blade model argue that the practice is a form of price gouging and builds distrust among the consumer community.

What Is the Razor Blade or Razor Model?

Gillette reasonedthat he could corner the facial hair grooming market if he could offer consumers a sturdy, permanent razor supplemented by cheap, easily replaceable blades. The idea was to create a massive, repeat customer base. Some consider him an adoptive father of the model but he was the entrepreneur who developed the idea of cheaply selling the razors themselves and capitalizing on the repeat business of replaceable blades.

King was Gillette's given name, not a nickname ascribed to him in a nod to his achievements. He made an absolute fortune from his business model, breaking down the initial sale into parts and deconstructing the idea that a consumer only buys a good product once.

Making a cheap product that was disposable allowed two things to happen. The consumer wouldn't mind that they had to replace blades if they were cheap and provided good value. And the model itself would hook users on the product.

It ingrained a buy-dispose-then-replace pattern as a routine and led to lifetime users of the product.

How the Model Has Evolved

The razor-razor blade model has evolved over the years to refer to any business practice in which a company offers a one-time product, usually aloss-leader at little or no cost, that's complemented by another product for which the consumer is required to make repeated purchases. An example of this practice would be cable and satellitecompanies giving away DVR devices to customers and then charging them monthly subscription fees for using the DVRs.

A company doesn't have to give away products to adhere to the razor-razor blade model, however. Both Sony and Microsoft sold their products at a significant loss during the first few years of manufacturing the video game consoles. They later made up for these losses by offering gaming subscriptions, software licensing agreements, and other purchases. These companies managed to exploit the razor-razor blade model and generate profits from loyal, repeat consumers.

Problems With the Model

The razor-razor blade 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 Activision Blizzard (ATVI) have pushed it even further, however, 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 it perpetuates an atmosphere of distrust within the consumer community. It can lead consumers to make their purchases elsewhere so they can receive more perceived value. The companies aren't able to build desirable brand loyalty within their target demographic as a result.

What Is a Loss-Leader?

A loss-leader is a pricing strategy. It's a product that's sold at a price that's almost certain to lose the company money. The loss can be balanced, however, if painlessly purchasing the cheap product brings in new customers who will eventually buy more products.

The strategy is commonly used by new businesses but some established and well-known companies have used it as well.

Is "King" a Nickname?

King was Gillette's given name, not a nickname ascribed to him as a nod to his achievements. His middle name was Camp.

When Was the Gillette Company Founded?

King Gillette first came up with the idea of disposable razors in 1895. It was six more years before they were mass-produced. The Gillette Safety Razor Company's first sale occurred in 1903.

The Bottom Line

The razor blade business model was launched when King Gillette began creating disposable razors with a strategy in mind. His strategy evolved into selling a product at cost or even at a loss with the goal of later selling a cooperative product that would turn a profit. The concept has been employed by Microsoft, Sony, and numerous cable and satellite companies.

Critics of the razor blade model claim that it’s a form of price gouging.

Razor Blade Business Model: Meaning, History, Problems (2024)

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