A small idea in the head of a traveling salesman in 1895 gave the world one of its most iconic brands and a unique business model. Several international brands like Microsoft, Sony, HP, and Amazon used this strategy and made billions of dollars. The strategy we're discussing is the Razor Blade model, which was invented by the world's most popular razor brand, Gillette. But to understand this, we have to dive into the history of Gillette and discover what led the big guys to take inspiration from a razor maker.
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Story Time 📖
The story dates back to the late 19th century when men shaved with straight razors that needed to be sharpened every day using a leather strop. While relatively expensive razor blades also wore out fast and required regular sharpening, a razor whose blade could be thrown away when it dulled would satisfy a real demand and would certainly be profitable. This was when salesman and inventor King Camp Gillette developed the concept of a safety razor with disposable blades.
It took six years to convert the concept into a functional model and drawings that could be submitted to the Patent Office. The most challenging part of the development was designing the blades, which were difficult to handle and sharpen due to the thin, cheap steel. This explains the long delay between the initial concept and the product's launch. With the help of a friend named John Joyce, Gillette founded the American Safety Razor Company (later renamed Gillette Safety Razor Company) in 1901 to sell the product.
Gillette remained the market leader for the next 15 years and became a million-dollar company. When the United States entered World War I in 1917, the company supplied all American soldiers with a field razor set, which was funded by the government. Gillette's original razor patent was about to expire in November 1921, and every competitor was eager to take advantage of the opportunity. Within a year, the company suffered a significant drop in sales of around 20%. Gillette had to execute nothing short of a miracle if it wanted to stay ahead of its competitors. This is when they introduced the revolutionary pricing model known as the Razor Blade model.
Razor Blade model 🪒
The Razor Blade model is a pricing strategy in which a product is sold at a cheap price, sometimes even at a loss, in order to sell a related product later for a profit. The model owes its name to King Gillette, who famously quoted, "Give 'em the razor; sell 'em the blades".
Gillette started to sell razors at a minimal price with low margins and then charged a premium for the disposable replacement blades. Since the costlier blades had to be replaced regularly, the consumer had no alternative but to buy them as they were the only blades compatible with the razor handle. This resulted in continuous profits for the company, and its sales skyrocketed.
Legacy
The Razor Blade business model tries to eliminate competition by first providing a free or low-cost product, even if the company must incur a loss. Once customers become loyal, the company can sell them more profitable products.
Even after 100 years, this strategy is still employed by some of the most renowned companies of the 21st century.
Microsoft. Sony and Nintendo
The video game industry makes the best use of this strategy by selling their video game consoles at cost price or even at a loss just to generate profits from selling their expensive video games. For instance, even at $499, Microsoft makes no money from selling its Xbox One X gaming console, but it makes around $7 on each $60 video game.
Kodak and Fujifilm
The instant cameras made by these brands are sold at very low margins while the film they require can cost up to $2 per photo. Digital photography, on the other hand, made the strategy outdated because it requires no consumables.
HP and Canon
Printers are often sold at or below cost to promote the sales of their exclusive cartridges, which generate profits for the manufacturer during the equipment's lifetime. These companies provide a wide range of printers. In certain situations, the cost of changing disposable ink or toner can be equal to the cost of purchasing a new printer with included cartridges.
Amazon
Amazon: Amazon makes no money when it sells Kindle e-Readers, but does so to boost the sales of its ebooks.
Conclusion
The razor blade business model aims to minimize competition and provide consumers with the opportunity to test a product at a low cost before converting them into loyal customers. However, the strategy has been tied to environmental issues as well as brand resentment. There is also the risk that the expensive product may become unprofitable or a new competitor may appear. Therefore, simply following this model does not guarantee a company's success.
7 for 7 🙌
META, a company that claims Facebook stole its name, is suing for infringement.
Tweet of the week :-
Tech Tool of the week 🖥:- Download any book for absolutely free using libgen.
Personal Finance Tip #3 💸 :- The golden rule of budgeting is to spend 50% of your after-tax income on needs, 30% on wants, and 20% on savings. This is popularly known as the 50/30/20 budget rule.
Quote of the week 🖋:-
“Life is like photography. You need the negatives to develop.”
- Ziad Abdelnour
Book of the week 📚:- Phil Knight's memoir about the birth of Nike, Shoe Dog, is a realistic reflection of what the road to success truly looks like.
TV Show of the week 🍿:- Formula 1: Drive to Survive on Netflix is a great inside look at how professional racing is.
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