What is it?
The razor-razorblade business model is a pricing strategy in which the primary good is sold mostly at a loss or at break-even, and the complementary good is sold at a higher price. The idea here is, that the losses incurred in selling the primary good will be offset by the sale of complementary goods at a premium, while also generating healthy profits. This model is most commonly used in consumer goods but has also been adopted by electronics and service businesses like SaaS, in recent times.
Examples of businesses that employed this model
As the name suggests, this model was initially used by razor companies and pioneered by Gillette. The razor was sold at a very low throwaway price, but the replacement blades were priced higher.
Videogame console companies like Microsoft, Sony & Nintendo heavily use this model. Their consoles namely Playstation, Xbox, and Switch are sold at a loss, and the game titles are sold individually at a premium.
Printer companies like HP, Epson, Brother, and Canon sell their printer hardware at lower prices, but the ink cartridges are sold at a markup price and also limit the hardware based on ink levels.
The most successful business that employed this model in recent times is Amazon Kindle. The kindle hardware is extremely low priced, and Amazon even said they make losses on each of the kindle devices they sell. But it more than makes up for the loss through the sale of its kindle ebooks and subscription services like kindle unlimited, audible.
So how does this benefit the business?
Lower Entry Barrier for Consumer
If your primary product is expensive, there won’t be many takers for it. So intentionally lowering the price of your main product results in more and more people buying it, as the upfront cost is lower.
As the consumer has already bought the primary good, he would be inadvertently forced to buy the complementary good. This results in consumers being locked into the product and firm. And as long as the product offered a good user experience, it also results in higher brand loyalty.
Steady revenue stream & recurring sales
If you are able to get the consumer to buy the primary product, you are guaranteed the sale of the companion product, which is also recurring quite often. This drives up Customer Lifetime Value as user retention is higher. For example, if I bought a printer, I most assuredly would buy ink cartridges as long as the printer is operational.
What are the pitfalls?
Lower perceived value by the consumer
If your primary product is sold at a very cheap price, the consumer might also be inclined to think that the product is of lower quality. If there’s already an incumbent with a good brand reputation, it gets harder to establish the brand.
Since the Primary product is lower, competitors can also launch the same offering. And user can also switch to competitors as the entry barrier is low.
Additionally, competitors can sell the complementary product at lower prices, and consumers may choose them as it’s cheaper than ours. Companies often counter this by making primary product proprietary or by patents.
Printer manufacturers enable software and hardware limitations on printers so that third party ink-cartridges won’t fit or work. Razor companies make their razor in such a way that only their brand blades can be attached to their razor.
Locking in a consumer is a double-edged sword. If your product offers a subpar experience or if your complementary good is not available or the user can’t choose a different brand due to switching costs, consumers would be dissatisfied and may never trust the brand again.