Razor - Razorblade

In the razor-blade business model is designed to encourage 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).

Gillette

Schick

Brother printers and cartridges

HP printers and cartridges

Microsoft Xbox

Atari

Sony Playstation

Roche Glucometers

Lifescan Glucose Meters

Intuitive Surgical

Philips Sonicare

OralB

Keurig

Nespresso

Kodak

Comcast DVRs

Pur

Brita

P&G Swiffer

Standard Oil

Benefits

  • Lower upfront cost to purchase razor
  • Shift most expense to use
  • Ideal when customer revenue tied to usage (e.g. hospitals, robotic surgical supplies, and reimbursement codes aligned)

Challenges

  • Frustration with brand lock-in
  • High priced consumable results in delayed consumable purchase (e.g. dull razor, or failure to check blood glucose)
  • High priced consumable discourages frequent use (e.g. failure to buy test strips to check blood glucose)

Top KPIs

  • Total cost of ownership vs. alternative
  • Total cost of consumable vs. generic offering if available

Benefits

  • Accelerates growth by lowering the barrier to purchase
  • High margins for business overtime with profits built into usage (razor)
  • Service models to encourage greater consumables use can be built to lock-in customers

Challenges

  • Razor + razorblade models are targets for disruption as startups offer a flat fee or lower fee models
  • Customers may complain of product lock-in
  • Suppliers may attempt to create off-brand consumables, so IP defense often required
  • Need to engineer a solution to deliver cost structure of razorblade – high margin but low cost for consumable vs. primary product

Top KPIs

  • Total sales of razors
  • Total sales of razorblades
  • Contribution margin of Razorblades yields margin advantage (e.g +10% razorblade gross margin vs. razor)

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.

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. (See Razors-and-Blades Myth(s) by Picker in sidebar link).

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 be in a position to invest in R&D and other product and service innovations to stay at the top.

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 strem. 

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.

 
  • 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 consumer with a subscription model vs. a razor / razorblade?
  • Are there disruptors aiming for incumbents in your market or adjacent markets?
  • Is it possible to create a product service experience with a main product and a consumable?
  • 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.

The Razor/Razorblade Model by Omar Kateeb, 2019.

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.

Business Model Workshop

Razorblade is a business model at risk. Make sure you explore multiple strategies or pursue a transition strategy.