What Is the Razor and Blade Business Model? Apple’s Reversed Razor and Blade Strategy
The razor and blade business model is a strategy that relies on selling what is supposed to be the primary product at a low price or given away for free; while complementary goods get sold at high margins. For instance, Gillette’s razor would cost a few bucks. Instead, a set of blades will be 3-4 times more expensive. Companies like Apple, instead, follow a variation of that, called reverse razor and blade where the core product (the iPhone) is sold at wide premium, and the ancillary products/services (apps) are mostly free, or inexpensive.
https://fourweekmba.com/wp-content/uploads/2022/01/Razor_and_Blade_Strategy.mp4Apple and the reversed razor and blade business modelIf you ever bought an iPhone, you’re aware of the fact that it can cost as much like a computer. In fact, Apple rather than decrease its prices overtime is actually uses the opposite strategy. In fact, the latest confirmation of this strategy comes from the iPhone X, which has an even higher margin compared to the iPhone 8. As reported by reuters.com:
The iPhone X smartphone costs $357.50 to make and sells for $999, giving it a gross margin of 64 percent, according to TechInsights, a firm that tears down technology devices and analyzes the parts inside. The iPhone 8 sells for $699 and has a gross margin of 59 percent.
In short, In this case, the iPhone is the blade. What is the razor then? That is the iTunes or the set of digital products Apple made available through its store. In fact, when Apple launched iTunes, a CD would cost anywhere between $16 or $18. Today you can get an album for $9.99 or 99 cents per song.
In fact, as reported by billboard.com:
Steve Jobs “said to us, ‘There’re two things you have to accept: 99 cents for every single song, and every song has to be sold as a single.’ And we went home and swallowed hard because that was tough for us to accept for us as a music industry…. If certain songs were really popular we should be able to set the price at whatever we thought was the right price as opposed to the $1 price. Steve said, ‘You know, you’ve got to keep it simple, you’ve got to keep it clean.’”
Thomas Hesse: President, Corporate Development and New Businesses, Chief Digital Officer at Bertelsmann. He was Chief Strategy Officer for BMG Music Entertainment when the iTunes Music Store launched.
Understanding the razor-blade business model
The razor blade business model, also known as the razor-razorblade model, involves selling a product at a lower price to then selling a related product later for a profit. The razor and blade business model has been popularized by King C. Gillette, founder of safety razor company Gillette, which sold a durable razor at cost while selling disposable blades at a premium.The razor blade business model, also known as the razor-razorblade model, involves selling a product at a lower price to then selling a related product later for a profit. The razor and blade business model has been popularized by King C. Gillette, founder of safety razor company Gillette, which sold a durable razor at cost while selling disposable blades at a premium.
The razor blade business model describes the strategic positioning of one product as free or complimentary to boost sales of a dependent product that generates revenue.
The model is often attributed to King C. Gillette, founder of safety razor company Gillette. The entrepreneur reasoned that if he could sell consumers a durable razor handle for very little, he could sell the disposable replacement blades at a premium price.
The company reaped the rewards of Gillette’s strategy since the expensive blades needed to be replaced constantly. What’s more, the consumer had no choice but to purchase them as they were the only blades that were compatible with the razor handle. The strategy was such a success that current owner Proctor & Gamble continues to use it today.
The razor-blade business model intends to avoid competition by offering a free or low-cost product in the first instance – even if the business must incur a loss. Once customer loyalty has been attained, the company has an easier time selling them more profitable products.
Note that the razor-blade model is similar to the freemium model, where digital products and services are offered for free under the expectation that a consumer will pay for features at some future point.
Companies utilizing the razor-blade business modelAside from razor blades themselves, there are many other brands in different industries utilizing this business model.
Let’s take a look at a few of these below:
Keurig – the company sells a range of single-serve coffee makers, with some available for less than $100. Where Keurig makes money is in the sale of coffee pods, with a 6-pack alone retailing for around $20. Microsoft, Nintendo, and Sony – these companies have almost always sold their video game consoles at close to cost price or less. The razor-blade model is prevalent in the industry because consoles require hardware updates and price cuts to ensure they remain relevant over long periods. The “blade” in this case is the video game itself. Hewlett Packard – HP has a wide range of printers, with some of the cheapest retailing for around the same cost as an ink refill. The company is counting on its customers having to constantly replace the toner cartridges to make moneyPotential limitations of the razor-blade business modelThe benefits of the razor-blade business model for businesses are well stated. But there do also exist some limitations:
Environmental costs – some companies using the model have been criticized for the amount of waste they generate. In today’s world, businesses are expected to be environmental stewards and those that are seen to be destructive will lose customers to their competitors. Coffee pod brands were banned in some workplaces because their compositional mix of plastic, metal and coffee grounds made them impossible to recycle.Brand resentment – some consumers also become resentful of the company for effectively forcing them to use a certain product. This feeling may be exacerbated by prices the consumer considers too expensive. For example, many consumers are bemused by the fact that the price of ink is comparable to the price of a printer.Outlay risk – brands who implement the razor-blade model always run the risk that they will not recoup their initial costs. If the business is heavily subsidizing the initial product, poor sales in the premium product may result in an overall loss.Competition – when a company sells its premium product with a higher margin, a competitor can offer the same product for less without incurring the expenses associated with developing the free or low-cost product.Key takeaways:The razor blade business model also known as the razor-razorblade model, involves selling a product at a lower price to then sell a related product later for a profit.The razor blade business model has been used by brands such as Keurig, Microsoft, Nintendo, Sony, and Hewlett Packard.The razor blade business model endeavors to reduce competition and enable consumers to try a product at a low cost before turning them into repeat buyers. However, the model has been associated with environmental concerns and brand resentment. There is also the risk that the premium product becomes unprofitable or a new competitor emerges.Other handpicked related business models:
How Does PayPal Make Money? The PayPal Mafia Business Model ExplainedHow Does WhatsApp Make Money? WhatsApp Business Model ExplainedHow Does Google Make Money? It’s Not Just Advertising! How Does Facebook Make Money? Facebook Hidden Revenue Business Model ExplainedMarketing vs. Sales: How to Use Sales Processes to Grow Your BusinessThe Google of China: Baidu Business Model In A NutshellAccenture Business Model In A Nutshell Salesforce: The Multi-Billion Dollar Subscription-Based CRMHow Does Twitter Make Money? Twitter Business Model In A NutshellHow Does DuckDuckGo Make Money? DuckDuckGo Business Model ExplainedHow Amazon Makes Money: Amazon Business Model in a NutshellHow Does Netflix Make Money? Netflix Business Model ExplainedBusiness resources:
The Ultimate Guide to Market SegmentationSuccessful Types of Business Models You Need to KnowThe Complete Guide To Business DevelopmentBusiness Strategy: Definition, Examples, And Case StudiesWhat Is a Business Model Canvas? Business Model Canvas ExplainedBlitzscaling Business Model Innovation Canvas In A NutshellWhat Is a Value Proposition? Value Proposition Canvas ExplainedWhat Is a Lean Startup Canvas? Lean Startup Canvas ExplainedMarketing Strategy: Definition, Types, And ExamplesMarketing vs. Sales: How to Use Sales Processes to Grow Your BusinessHow To Write A Mission StatementWhat is Growth Hacking?Growth Hacking Canvas: A Glance At The Tools To Generate Growth IdeasOther business models patterns:
Hidden revenue business modelOne-for-one business modelRazor and blade revenue modelCash conversion cycle or cash machine business modelPeer-to-peer business modelMulti-sided platform business modelDirect sales business modelFreemium business modelAffiliate marketing business modelSubscription business model(Management) consulting business modelAgency-based business modelVertically integrated supply chain business modelE-commerce marketplace business modelThe discount business model that focuses on high qualityAttention merchant business modelPrivacy as an innovative business modelThe most successful franchising business model in the worldOn-demand subscription-based business modelUser-generated content business modelThe educational niche business modelA mix of chain and franchise business modelInstant news business modelBlockchain-based business modelsMulti-brand business modelFamily-owned integrated business modelHumanist enterprise business modelDirect-to-consumers business modelEnterprise business model built on complex salesDistribution based business modelThe post What Is the Razor and Blade Business Model? Apple’s Reversed Razor and Blade Strategy appeared first on FourWeekMBA.
