Chapter 39

Razor and Blade

The pattern

In the Razor and Blade business model, the basic product is offered at a bargain price below cost, or even for free. Additional products that customers need in order to use the basic product, on the other hand, are high-priced and so become responsible for generating most of the revenues (WHAT?, VALUE?). This simple yet ingenious business logic is also known as the ‘bait and hook’ method. The principal idea of the pattern is to win the customers’ loyalty by lowering the barriers for purchasing the basic product (WHAT?). Money will start coming in once the customers purchase complementary products (VALUE?).

Razor and Blade requires basic products to be cross-subsidised by accessories. This business model can be particularly lucrative when accessories are frequently used (VALUE?). In other words, the company sells not just basic products, but also increases potential revenues associated with future sales of complementary products. In order to capitalise on this potential, exit barriers must be built in preventing customers from purchasing complementary products from competitors. Common strategies include patenting the complementary product or building a strong brand (HOW?). The Razor and Blade pattern is often employed in combination with the Lock-In (#27) strategy, as illustrated by Nespresso.

The origins

To trace the origins of the Razor and Blade business model we have to look far back into history. One of the fathers of the pattern is John D. Rockefeller, who started to sell cheap paraffin lamps in China towards the end of the 19th century. Purchasers of the lamps had to buy expensive fuel in order to light them, which Rockefeller manufactured in his Standard Oil Company refineries. This business model generated such enormous revenues through the sale of oil that Rockefeller became the richest man in the United States and later even the world. The term ‘Razor and Blade’, however, stems from another famous entrepreneur: razor blade pioneer King Camp Gillette, who invented the interchangeable razor blade at the beginning of the 20th century. To boost blade sales, Gillette gifted the corresponding razors to military establishments and universities. Success of the disposable razor blade system was so resounding that the company sold more than 134 million razor blades within three years of bringing the product to market. Incidentally, Gillette is also a prime example of how patents can be used effectively in conjunction with the Razor and Blade business model. The Gillette Fusion razor alone is protected by over 70 patents. This makes it exceedingly difficult for competitors to enter the lucrative razor blade business and usurp Gillette’s primary source of income.

The innovators

Hewlett-Packard appropriated the model in 1984 by adapting it for the ThinkJet – the first inkjet printer in the world developed for private use. Unlike expensive industrial printers, it sold for as little as US $495, rendering it affordable to the average American. Hewlett-Packard generated most of its revenue through the subsequent sale of printer cartridges. This business model influenced the future course of the entire printer industry, and Razor and Blade is the primary business model employed by printer manufacturers even today.

Razor and Blade: timeline

Another prominent company that effectively uses the Razor and Blade business model is Nestlé’s Nespresso. Here the system involves a combination of inexpensive coffee machines and pricey coffee capsules. The introduction of the Razor and Blade business model in the coffee industry over 20 years ago signified a marked break with the previous industry logic. Coffee had earlier been viewed as a simple commodity: there was no room for high prices or innovation. Nespresso’s business model innovation was so successful – the company’s revenues were assumed to be about €5 billion in 2018 alone – that Nestlé has since applied the Razor and Blade model to other products such as tea (Nestlé Special.T).

The Razor and Blade pattern is also successfully applied by the game console industry, including players such as Sony with its PlayStation or Microsoft with its Xbox lines. Offering the consoles at close-to production expenses, profits are generated with games that are now even more easily accessible because of direct purchasing on the console. Here, the Razor and Blade pattern is potentially also combined with the Subscription business model (#48). Further examples of Razor and Blade industries are eReaders and electric toothbrushes.

An interesting variation of the business pattern is the reversed Razor and Blade model. Applied by companies such as tech-giant Apple or home appliances bedrock Vorwerk, the basic product is sold at premium prices while the required consumables are relatively low-priced, or not even required to use the product. Apple used the reversed Razor and Blade pattern for its iPod, which was sold at high prices and was connected to the iTunes store to purchase music at fair pricing. For Vorwerk, the pattern is applied to its Thermomix kitchen appliance (with its recipe modules) or vacuum cleaner products with its vacuum cleaner bags. However, in both cases, the customer can also easily use the consumables from other providers, which puts the revenue focus on selling the basic product, while the consumable has only a supporting function.

When and how to apply Razor and Blade

Razor and Blade is very well known in the B2C context. In future, however, we will be seeing more and more B2B firms that make use of it, especially in the after-sales business – in the machinery industry, for example. This pattern is particularly powerful when combined with Lock-In effects (#27). Companies today already use these patterns to protect their lucrative after-sales and spare-part businesses from imitative competitors. In order to capitalise on these business model patterns, you may need to strengthen your patenting and branding capabilities.

The pattern can also be applied in the machinery industry if the after-sales or service business can be protected. Such a Lock-In effect is possible with patented spare parts or remote diagnostic tools, which can be operated far more efficiently by the OEM.