By Arnav Garg
The Razor Blade Model is a type of business model wherein companies utilize the inter-dependence of multiple components of a product to maximize profit. A boiled-down implementation of such a model requires the deployment of a basic item at break-even cost, or sometimes even at a loss. The intent of this basic item often referred to as the ‘bait’ is purely to lure customers into a system of recurring income for the company. Oftentimes, the bait is a more expensive investment for the customer but provides a low-profit margin for the business itself. Purchasing the bait results in ‘customer lock-in’ wherein the customer tries to extract the maximum perceivable benefit of their investment and is discouraged to wander off the system. Subsequently, a dependent item is sold without which the basic item is useless. This dependent item is referred to as the ‘hook’ which is usually low-cost but extremely high profit-margin.
With the rise of the internet age, companies have tweaked the model to ensure a consistent flow of paid users. One such modification is the “Reverse Razor Blade Model” wherein the primary product is sold with a high-profit margin, usually with a high cost. Eventually, more profit is squeezed with a multitude of high-profit margin, low-cost offerings that enhance the primary product's overall experience. Customers are free to pay for any number of these offerings, which quickly adds up to form a massive revenue stream.
- Gillette: The namesake of this business model sells razors as bait and blades as hooks.
- HP: They sell printers as bait and corresponding ink cartridges as hooks.
- Nestle: They sell coffee machines as bait and proprietary coffee packets as hooks to be used in the coffee machine.
- Sony Playstation: They sell gaming consoles as hooks and manufacture game CDs in association with developers to be sold as hooks.
- JioFibre: They sell internet routers as bait and data packs as hooks.
- Kodak: They sell cameras as bait and proprietary photo films as hooks.
- Nuclear Reactors: Corporations involved in the nuclear energy business bid for tenders to develop nuclear reactors at marginal costs in nations across the world which then act as baits to extract humongous revenue from governments by selling compatible enriched uranium fuel.
- Apple iPhone (Reverse): They sell their iPhone as the primary product and maintain a consistent revenue stream by selling paid applications on their App Store.
- Amazon Kindle (Reverse): They sell their Kindle e-reader tablet as bait and make a profit off the cuts on e-books published in association with various publishing houses.
To effectively regulate the premium profit margin of the hook, businesses are compelled to monopolize their product, since competition can quickly erode these margins. Traditionally, companies execute monopolization using a combination of these two approaches:
- Designing proprietary products so that only licensed hooks can be used with the bait. This eliminates the possibility of cheaper third-party hooks to eclipse sales of high-margin proprietary products.
- Invoking intellectual property rights to gain a huge chunk of market share initially and sustaining it through brand loyalty or customer lock-in.
Once the company’s hold on intellectual property rights expires, some choose to stifle competition through predatory pricing. These larger corporations can burn through cash reserves for a longer duration while eliminating companies trying to get a foothold in the market. However, stifling competition through monopolization is a legal grey area and can render the practice illegal altogether.
This kind of business practice has been perceived by some as a form of price manipulation and perpetuates an atmosphere of distrust within the consumer community. It can lead consumers to make their purchases elsewhere where they are receiving more perceived value, and in turn, the companies are not able to build desirable brand loyalty within their target demographic.
Since the conceptualization of its proverbial implementation “Give ’em the razor; sell ’em the blades” in 1901 by King Camp Gillette, the Razor Blade Model's underlying ideas have trickled down to give rise to contemporary business methods such as the Freemium Model. Internet-based businesses often offer their application or service for free and charge a considerable subscription cost for upgrades or modifications, such as YouTube Premium and PUBG. When implemented on the scale at which online players operate, the model generates a huge revenue stream for the business. It’s safe to say that the Razor Blade Model has been one of the most consequential developments in business strategy in recent history.
The article is written for 180 Degrees Consulting, Delhi Technological University, under the campaign #DemystifyingBizModels. To read more content shared by our other consultants, please check out our LinkedIn page- https://www.linkedin.com/company/180dc-dtu