The Razor Blade model: a 100% certain source of recurring revenue?

OUR ANALYSIS


  • Principles:


The razor blade model is a business model in which one item is sold to customers at a relatively low margin (or even given away for free) to increase the sales of complementary products or accompanying accessories. Apart from the initial one-time purchase, the vast majority of revenue in this business model comes from the accompanying supplies that have to be repurchased after every use.



  • Advantages & Challenges:

The main advantage of the razor blade model is that once a customer is acquired through the initial purchase, (s)he is locked into the model. This means that recurring revenues are assured for the company (if this particular customer remains loyal). Thus, when this model is carried out successfully, the company creates a monopoly situation which is very advantageous economically.

There are some clear challenges in carrying out a razor blade model efficiently since a company needs sufficient market share and loyal customers in order to remain profitable just by selling accessories. For this to happen the company should make sure that:

  • The initial product is very attractive, which can, for example, be done by offering a low price or creating an attractive brand identity

  • The accessories are of essential importance to the initial product (and thus the customer). In other words, this product loses its value without the repurchase of accessories

  • The company is able to protect its monopoly situation concerning the accompanying supplies. Either it should be highly complex to make other products that are compatible with the initial product or legal protection (patents) should be used


  • Evolution & Maturity :


The razor blade model was invented in the 1920s and although it was Gilette who made the model famous, it was their competition back then who came up with the model. The model started to gain more importance around the turn of the century. Apart from physical goods, the model has now spread to intangible goods as well. A good example is the game industry: video game companies sell their consoles without margin or even at a loss, but get a large margin on each game sold to their customers. With the rise of international competition, it is now more and more complex for a company to create a monopoly situation that is sustainable, which may discourage companies from implementing this business model.


  • Key figure:

The Xbox One, for example, sells at a price of £499 with a manufacturing cost of £471. This leads to a very low margin and in some promotion cases even to a loss. It's the sale of games that makes these consoles profitable.

  • Products & Services:

In order to use the razor blade model, a product must meet several specific characteristics. First of all, the initial product must be a fitting, complemented by an accessory that provides real added value. In addition, the product must be innovative in order to be protected by patents or to be difficult to copy. Examples are coffee machines, printers, film cameras, game consoles etc.



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