Razor-Blade Business Model

The razor-blade business model is the best example of how product innovation can enable innovation in an entire business model. In the razor-blade business, a core product (the razor) is sold at a discount for a lower margin of profit, but it requires buying another product (the blade) that brings a higher margin to the maker. The real money is not in the razor but in the blade.

When it works well

A bargain offer upfront 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.

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.

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 Razor-Blade Model

Winner take most

As soon as a company moves successfully to a razor-blade model, competitors follow suit, and the pressure to win increases exponentially. The company with the largest market share wins the game by definition: more razor blades multiplied by the gain in margin means more money to offset any loss from the lower margin on razors. The winner will have a superior cash flow and thus be in a position to invest in R&D and other product and service innovations to stay at the top.

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 nonrecyclable 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.

The business model mechanisms to test:

Mechanism to test Metrics to measure
What is the right price to draw customers into that first purchase? Conversion to customer
How do customers know when to “refresh” the razor blade? How do they respond to marketing messages once they’ve become customers? Engagement metrics for digital channels, response to first message for upgrades
How loyal is our customer, and is this out of lazy habit or choice? Life time value, average revenue per user

Emerging trends:

Razor-blade disruption

Two disruptors seem to have Gillette’s classic razor-blade model in their crosshairs. By combining the economics of the razor-blade model and the subscription model, Harry’s and Dollar Shave Club have become two of the fastest growing e-commerce companies in business.

Everything hardware has a blade

Hardware startups are tinkering with business-model combinations in order to benefit from long-term customer relationships innate in both the subscription and razor-blade models. Read our article “Don’t Just Sell Your Product” to understand what may make these business models more appealing than a pure hardware model.

Deeper Dives on the Razor Blade Business Model

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

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

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{4b0c188ae8604bf014d8bc27c7c65bbf455b55139b6ec077c9ec57d60479b1a7} After Earnings. Should You Buy? Coffee Maker is Scalded as Sales of Brewers and Pods Tumble, by Rich Duprey at The Fool, 2015.

What do you think about the Razor Blade model. Do you work in a company that has tried this approach? Do you have other resources or company suggestions we should source? Share your comments or suggest another business model to add to our library. 

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Business Models in Use

Gillette
Schick
HP printers and cartridge
Xbox
Playstation
Harry’s
Dollar Shave Club
Roche Glucometers
Lifescan Glucose Meters
Keurig
Nespresso
Pur
Brita
P&G Swiffer

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