Business Model: Razorblade

Razorblade

The razor-blade business model is designed to increase the price of consumption over time. The core product (the razor) is priced for sale and uptake, while the real money is made on the consumable (the blade).

Valuable to Customer

Benefits

Challenges

Key Performance Indicators

COMPANY PERSPECTIVE

Benefits

Challenges

Key Performance Indicators

When it Works Well

Customers value a proprietary system

Customers need to be convinced that their razor/razor-blade company offers greater value than its competitors. If the quality and the uniqueness of the product aren’t made clear, the customer will find it easy to go over to the cheaper alternative.

Reduces the upfront price hurdle to the customer

The razor-blade model (also known as the bait-and-hook model) was built on the insight that we love a bargain and tend to jump on a deal for a new product that seems cheaper than what its competitors offer. The overall cost of ownership—the razor plus the blade—may actually be higher, but that reduced fee upfront is enough of a deal to draw the customer in.

 

For example, Keurig and Nespresso’s coffee-making machines are attractively priced, but what both companies charge for a pound of coffee, in the form of K-Cups and Nespresso Pods, is the highest in the industry.

Habit generates a steady revenue stream

Once you’ve locked a customer into the core product (the razor), the real marketing work begins: turning the purchase of the consumable product (the razor blade) into a habit. If you succeed, you’ll be guaranteed a continuous revenue stream from a customer who buys more out of habit than out of loyalty.

Challenges to the Razorblade Model

Environmental costs

Many a razor-blade-model business has been skewered by environmental activists for the ecological damage its product causes. Keurig’s inventor has even expressed remorse about the increases in energy and non-recyclable waste that his invention requires to make a cup of coffee. Swiffer’s designers were criticized for “greenwashing” (making unsustainable claims that a product is sustainable). Nevertheless, these companies have continued to dominate; customers clearly value convenience and quality above all else. But new competitors might look toward solving the environmental-cost concern as a way of dislodging these incumbents.

Difficult Startup Strategy

Special note for the razorblade model: this is typically a later-stage strategy for an incumbent. Even Gillette did not begin with this business model strategy, originally charging a high price for razors. 

Winners take most

As soon as a company moves successfully to a razor-blade model, competitors follow suit, and the pressure to win increases exponentially. In the prior pre-internet era when supply economy of scale drove competitive dynamics, the company with the largest market share won the game by definition. More razor blades multiplied by the gain in margin meant more money to offset any loss from the lower margin on razors. The winner had a superior cash flow and thus was in a position to invest in R&D and other product and service innovations to stay at the top.

Trends in Razorblade

Vulnerable to Disruption

When direct-to-consumer business models started to rise, the first targets were razor and razorblade, business models. For example, Dollar Shave Club aimed squarely at the high cost and feature creep of the dominant razor company, Gillette, and quickly built a valuable business that was sold to Unilever for $1BN. The high long term profit margins of razor sales are replaced by subscription revenue, and the disruptor wins by lowering costs to the consumer.

Falling out of Disfavor Re: Circularity

The transition to circular economies has companies reconsidering the benefits of the razorblade model, particularly if the blade is a disposable one-use waste stream.

Key Razorblade Mechanisms to Test

KPIs depend on your unique business attributes and business model combinations. However, there are heuristics when investors evaluate a razor and razorblade, business model.

Before you Consider Razorblade

  • Is the main value proposition connected to the consumable experience (using the razor, drinking the pod espresso)
  • What are the current competitive dynamics: can the company benefit from supply economies of scale?
  • What are the benefits of going direct to consumers with a subscription model vs. a razor/razorblade?
  • Are there disruptors aiming for incumbents in your market or adjacent markets?

Testing the Model

  • Is it possible to create a product service experience with the main product and a consumable one?
  • Does lowering the price of the primary product result in greater product adoption and market share?
  • Is there a user proposition that can be easily tested and implemented?

More on Razorblade

Razor-and-Blades Pricing Strategies in the Digital Age, by Eric Savitz, Forbes, 2012.

Razor-and-Blade Model: What Is It? What Companies Have One? by Beth McKenna, The Motley Fool, 2017.

Gillette’s Strange History with the Razor and Blade Strategy, by Randy Picker, Harvard Business Review, 2010. (limited use)

The Razors-and-Blades Myth(s), by Randal C. Picker, University of Chicago Law School, 2011.

A Bad Business Model Is Taking Over the World: Razor blades and iPhones are like addictive drugs, by Daniel Altman, Foreign Policy, 2014.

The Razor/Razorblade Model by Omar Kateeb, 2019.

Canon Sued Over All-in-One Printer That Stops Scanning When It Runs Out of Ink, by by Andrew Liszewski, 2021.

How a Razor Revolutionised the Way We Pay for Stuff, by Tim Harford, BBC, 2017.

The Role of the Business Model in Capturing Value from Innovation: Evidence from Xerox Corporation’s Technology Spin-Off Companies, by Henry Chesbrough and Richard Rosenbloom, Oxford Journals, 2002. (paywall)

Business Model Innovation: Coffee Triumphs for Nespresso, by Kurt Matzler, Franz Bailom, Stephan Freidrich von den Eichen, and Thomas Kohler, Journal of Business Strategy, 2013. (paywall)

A Brewing Problem: What’s the Healthiest Way to Keep Everyone Caffeinated? by James Hamblin, The Atlantic, 2015.

Keurig Accidentally Created the Perfect Business Model for Hardware Startups, by Ben Einstein, Bolt Blog via Medium, 2015.

Keurig Green Mountain is Down 30 percent After Earnings. Should You Buy? Coffee Maker is Scalded as Sales of Brewers and Pods Tumble, by Rich Duprey at The Fool, 2015.