The razor and blades business model is a strategy about selling a durable product/basic product, or “razor,” at a low profit margin (sometimes even giving it away) to help drive sales of the higher-margin proprietary consumable or complementary, or “blades.” It is also called ‘Bait and Hook’. The basic product is cross subsidized by high margin proprietary consumables or complementary products.
The idea of this business model is to get customers in their fold and then earn recurring revenue from selling proprietary consumable products.
Some of the examples are
- Gillette – it sells cheap razors and expensive blades
- Inkjet printers – selling printers cheaply and ink expensively
- Sony PlayStation – Sony loses on the device but makes money when people buy games.
- Amazon Kindle – Amazon doesn’t make money on the device but later by selling books on Kindle.
Reverse Razor and Blade:
Is where the complementary product is cheap and the basic product is expensive. Here the customer is attracted to buy the expensive basic product as one can then access cheap complementary products. Eg: iPods and Songs.
Key to Razor and Blades strategy:
The key for the model to succeed is the ability to lock-in the consumer and prevent them for going for cheaper consumables. One way of doing that is patenting the complementary product or building a strong brand.
It is easier in digital businesses to lock-in the consumer like Kindle, Gaming console like PlayStation.
Another way to lock-in is by increasing the switching cost. The cost for the consumer is not only in terms of money but can also be in terms of time or hassle of switching to a competing product.
For example if one’s employees are trained on a particular software or system, and if one were to switch to another software which would require giving substantial training to the employees for using the new software, it increases the switching cost and one would be reluctant to switch.
Also, another switching cost can be in the form of sunk cost. For example if one has a large repository of Kindle Books or Playstation games, one would be reluctant to switch.
If one cannot create a lock-in for the customers then this strategy won’t work.
Get one such article delivered every day on Whatsapp. Subscribe at bit.ly/finixschool