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The razor and blades business model is a
business model A business model describes how an organization creates, delivers, and captures value,''Business Model Generation'', Alexander Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-published, 2010 in economic, soci ...
in which one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as
consumable Consumables (also known as consumable goods, non-durable goods, or soft goods) are goods that are intended to be consumed. People have, for example, always consumed food and water. Consumables are in contrast to durable goods. Disposable products ...
supplies. It is different from loss leader marketing and free sample marketing, which do not depend on complementary products or services. Common examples of the razor and blades model include
inkjet printer Inkjet printing is a type of computer printing that recreates a digital image by propelling droplets of ink onto paper and plastic substrates. Inkjet printers were the most commonly used type of printer in 2008, and range from small inexpensi ...
s whose ink cartridges are significantly marked up in price, and
video game console A video game console is an electronic device that outputs a video signal or image to display a video game that can be played with a game controller. These may be home consoles, which are generally placed in a permanent location connected to ...
s which require additional purchases to obtain accessories and software not included in the original package. Although the concept and the catchphrase "Give 'em the razor; sell 'em the blades" are widely credited to
King Camp Gillette King Camp Gillette (January 5, 1855 – July 9, 1932) was an American businessman who invented a bestselling version of the safety razor. Gillette's innovation was the thin, inexpensive, disposable blade of stamped steel. Gillette is often er ...
, the inventor of the
safety razor A safety razor is a shaving implement with a protective device positioned between the edge of the blade and the skin. The initial purpose of these protective devices was to reduce the level of skill needed for injury-free shaving, thereby reduc ...
, Gillette did not in fact follow this model.Picker, Randal C.
The Razors-and-Blades Myth(s)
(September 13, 2010). U of Chicago Law & Economics, Olin Working Paper No. 532. Available at SSRN: https://ssrn.com/abstract=1676444 or https://dx.doi.org/10.2139/ssrn.1676444


Development

The
legend A legend is a genre of folklore that consists of a narrative featuring human actions, believed or perceived, both by teller and listeners, to have taken place in human history. Narratives in this genre may demonstrate human values, and possess ...
about Gillette is that he realized that a disposable razor blade would not only be convenient, but also generate a continuous revenue stream. To foster that stream, he sold razors at an artificially low price to create the market for the blades. But Gillette razors were expensive when they were first introduced and the price only went down after his patents expired in the 1920s: it was his competitors who invented the razors-and-blades model.


Applications

This model has been used in several businesses for many years.


Standard Oil

With a monopoly in the American domestic market, Standard Oil and its owner,
John D. Rockefeller John Davison Rockefeller Sr. (July 8, 1839 – May 23, 1937) was an American business magnate and philanthropist. He has been widely considered the wealthiest American of all time and the richest person in modern history. Rockefeller was ...
, looked to China to expand their business. Representatives of Standard Oil gave away eight million kerosene lamps for free or sold them at greatly reduced prices to increase the demand for
kerosene Kerosene, paraffin, or lamp oil is a combustible hydrocarbon liquid which is derived from petroleum. It is widely used as a fuel in aviation as well as households. Its name derives from el, κηρός (''keros'') meaning "wax", and was regi ...
. Among American businessmen, this gave rise to the
catchphrase A catchphrase (alternatively spelled catch phrase) is a phrase or expression recognized by its repeated utterance. Such phrases often originate in popular culture and in the arts, and typically spread through word of mouth and a variety of mass ...
"Oil for the lamps of China." Alice Tisdale Hobart's novel '' Oil for the Lamps of China'' was a fictional treatment of the phenomenon.


Eastman Kodak

In its decades as the dominant photographic film producer in the United States,
Kodak The Eastman Kodak Company (referred to simply as Kodak ) is an American public company that produces various products related to its historic basis in analogue photography. The company is headquartered in Rochester, New York, and is incorpor ...
sold its cameras at low prices and enjoyed large profit margins on the consumables of the trade, such as film, printing supplies, and processing chemicals. While this strategy worked for many years, it was challenged in the late 20th century when a rival,
Fujifilm , trading as Fujifilm, or simply Fuji, is a Japanese multinational conglomerate headquartered in Tokyo, Japan, operating in the realms of photography, optics, office and medical electronics, biotechnology, and chemicals. The offerings from the ...
, introduced more economical film and processing methods. Finally, digital photography made the strategy obsolete, as it needs no consumables.


Instant cameras

Instant cameras also follow the razor and blades business model. For example, Fujifilm's
Instax Instax (stylized as instax) is a brand of instant still cameras and instant films marketed by Fujifilm. The first camera and accompanying film, the Instax Mini 10 and Instax Mini film, were released on November 10, 1998. The "Wide" film and fi ...
cameras are sold at a low price while the film they use costs as much as $ 2.00 per photo.


Issues

The razor and blades model may be threatened if competition forces down the price of the consumable item. For such a market to be successful the company must have an effective monopoly on the corresponding goods. (
Predatory pricing Predatory pricing is a pricing strategy, using the method of undercutting on a larger scale, where a dominant firm in an industry will deliberately reduce the prices of a product or service to loss-making levels in the short-term. The aim is th ...
to destroy a smaller competitor is not covered here.) This can make the practice illegal.


Specific examples


Printers

Computer printer manufacturers have gone through extensive efforts to make sure that their printers are incompatible with lower cost after-market ink cartridges and refilled cartridges. This is because the printers are often sold at or below cost to generate sales of proprietary cartridges which will generate profits for the company over the life of the equipment. In certain cases, the cost of replacing disposable ink or toner may even approach the cost of buying new equipment with included cartridges. Methods of
vendor lock-in In economics, vendor lock-in, also known as proprietary lock-in or customer lock-in, makes a customer dependent on a vendor for products, unable to use another vendor without substantial switching costs. The use of open standards and alternat ...
include designing the cartridges in a way that makes it possible to
patent A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an enabling disclosure of the invention."A ...
certain parts or aspects, or invoking the
Digital Millennium Copyright Act The Digital Millennium Copyright Act (DMCA) is a 1998 United States copyright law that implements two 1996 treaties of the World Intellectual Property Organization (WIPO). It criminalizes production and dissemination of technology, devices, or ...
to prohibit reverse engineering by third-party ink manufacturers. Another method entails completely disabling the printer when a non-proprietary ink cartridge is placed into the machine, instead of merely issuing an ignorable message that a non-genuine (yet still fully functional) cartridge was installed. In ''
Lexmark Int'l v. Static Control Components ''Lexmark International, Inc. v. Static Control Components, Inc.'', is an American legal case involving the computer printer company Lexmark, which had designed an authentication system using a microcontroller so that only authorized toner cartr ...
'' the
United States Court of Appeals for the Sixth Circuit The United States Court of Appeals for the Sixth Circuit (in case citations, 6th Cir.) is a federal court with appellate jurisdiction over the district courts in the following districts: * Eastern District of Kentucky * Western District of ...
ruled that circumvention of Lexmark's ink cartridge lock does not violate the DMCA. On the other hand, in August 2005,
Lexmark Lexmark International, Inc. is a privately held American company that manufactures laser printers and imaging products. The company is headquartered in Lexington, Kentucky. Since 2016 it has been jointly owned by a consortium of three multination ...
won a case in the United States that allows them to sue certain large customers for violating their boxwrap license.


Console Video games

Atari had a similar problem in the 1980s with
Atari 2600 The Atari 2600, initially branded as the Atari Video Computer System (Atari VCS) from its release until November 1982, is a home video game console developed and produced by Atari, Inc. Released in September 1977, it popularized microprocesso ...
games. Atari was initially the only developer and publisher of games for the 2600; it sold the 2600 itself at cost and relied on the games for profit. When several programmers left to found
Activision Activision Publishing, Inc. is an American video game publisher based in Santa Monica, California. It serves as the publishing business for its parent company, Activision Blizzard, and consists of several subsidiary studios. Activision is one ...
and began publishing cheaper games of comparable quality, Atari was left without a source of profit. Lawsuits to block Activision were unsuccessful. Atari added measures to ensure games were from licensed producers only for its later-produced 5200 and 7800 consoles. In recent times,
video game console A video game console is an electronic device that outputs a video signal or image to display a video game that can be played with a game controller. These may be home consoles, which are generally placed in a permanent location connected to ...
s have often been sold at a loss while software and accessory sales are highly profitable to the console manufacturer. For this reason, console manufacturers aggressively protect their profit margin against piracy by pursuing legal action against carriers of
modchips A modchip (short for modification chip) is a small electronic device used to alter or disable artificial restrictions of computers or entertainment devices. Modchips are mainly used in video game consoles, but also in some DVD or Blu-ray players ...
and jailbreaks. Particularly in the sixth generation era and beyond, Sony and Microsoft, with their PlayStation 2 and
Xbox Xbox is a video gaming brand created and owned by Microsoft. The brand consists of five video game consoles, as well as applications (games), streaming services, an online service by the name of Xbox network, and the development arm by the ...
, had high manufacturing costs so they sold their consoles at a loss and aimed to make a profit from game sales. Nintendo had a different strategy with its GameCube, which was considerably less expensive to produce than its rivals, so it retailed at break-even or higher prices. In the following generation of consoles, both
Sony , commonly stylized as SONY, is a Japanese multinational conglomerate corporation headquartered in Minato, Tokyo, Japan. As a major technology company, it operates as one of the world's largest manufacturers of consumer and professiona ...
and
Microsoft Microsoft Corporation is an American multinational technology corporation producing computer software, consumer electronics, personal computers, and related services headquartered at the Microsoft Redmond campus located in Redmond, Washin ...
have continued to sell their consoles, the
PlayStation 3 The PlayStation 3 (PS3) is a home video game console developed by Sony Computer Entertainment. The successor to the PlayStation 2, it is part of the PlayStation brand of consoles. It was first released on November 11, 2006, in Japan, November ...
and
Xbox 360 The Xbox 360 is a home video game console developed by Microsoft. As the successor to the original Xbox, it is the second console in the Xbox series. It competed with Sony's PlayStation 3 and Nintendo's Wii as part of the seventh generati ...
respectively, at a loss, with the practice continuing in the most recent generation with the PlayStation 4 and
Xbox One The Xbox One is a home video game console developed by Microsoft. Announced in May 2013, it is the successor to Xbox 360 and the third base console in the Xbox series of video game consoles. It was first released in North America, parts of ...
.


Nuclear energy

Ever since the beginning of the commercial nuclear power industry, the business model has centered on selling the reactor at cost (or at a loss) and making its profits off fuel-supply contracts by exploiting vendor lock-in.


Mobile phones

Mobile handsets provided with monthly usage contracts are often provided at below cost price or even free of charge, particularly if obtained as an upgrade from an older model. The monthly contract funds the handset cost and in many countries, the contract will include a minimum contract term which has to be carried out. This will often work out to be more expensive than buying the phone outright.


Other goods

Consumers may also find other uses for the subsidized product rather than utilize it for the company's intended purpose, which adversely affects revenue streams. This has happened to "free"
personal computers A personal computer (PC) is a multi-purpose microcomputer whose size, capabilities, and price make it feasible for individual use. Personal computers are intended to be operated directly by an end user, rather than by a computer expert or tec ...
with expensive proprietary
Internet The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, pub ...
services and contributed to the failure of the
CueCat The CueCat, styled :CueCat with a leading colon, is a cat-shaped handheld barcode reader that was given away free * * * to Internet users starting in 2000 by the now-defunct Digital Convergence Corporation. The CueCat was named CUE for the uniqu ...
barcode scanner.
Affiliate marketing Affiliate marketing is a marketing arrangement in which affiliates receive a commission for each visit, signup or sale they generate for a merchant. This arrangement allows businesses to outsource part of the sales process. It is a form of ...
makes extensive use of this business model, as many products are promoted as having a "free" trial, that entice consumers to sample the product and pay only for shipping and handling. Advertisers of heavily-promoted products such as açaí berry targeting dieters hope the consumer will continue paying for continuous shipments of the product at inflated prices, and this business model has been met with much success. Websites specializing in sampling and discounts have proven to be popular with economy-minded consumers, who visit sites which utilize free samples as link bait. The business model of these sites is to attract visitors that will click through to complete affiliate offers.


Tying

Tying is a variation of razor and blades marketing that is often illegal when the products are not naturally related, such as requiring a bookstore to stock up on an unpopular title before allowing them to purchase a bestseller. Tying is also known in some markets as 'Third Line Forcing.'Trade Practices Act – Third Line Forcing
/ref> Some kinds of tying, especially by
contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...
, have historically been regarded as
anti-competitive Anti-competitive practices are business or government practices that prevent or reduce competition in a market. Antitrust laws differ among state and federal laws to ensure businesses do not engage in competitive practices that harm other, usuall ...
. The basic idea is that consumers are harmed by being forced to buy an undesired good (the tied good) to purchase a good they actually want (the tying good), and so would prefer that the goods be sold separately. The company doing this bundling may have a significantly large market share so that it may impose the tie on consumers, despite the forces of market competition. The tie may also harm other companies in the market for the tied good, or who sell only single components. Another common example comes from how cable and satellite TV providers contract with content producers. The production company pays to produce 25 channels and forces the cable provider to pay for 10 low-audience channels to get a popular channel. Since cable providers lose customers without the popular channel, they are forced to purchase many other channels even if they have a very small viewing audience.


See also

*
Aftermarket (merchandise) In economic literature, the term "aftermarket" refers to a secondary market for the goods and services that are 1) complementary or 2) related to its primary market goods ( original equipment). In many industries, the primary market consists of d ...
* Complementary good, a good that should be consumed with another good * Consumption subsidies *
Demo Demo, usually short for demonstration, may refer to: Music and film *Demo (music), a song typically recorded for reference rather than release * ''Demo'' (Behind Crimson Eyes), a 2004 recording by the band Behind Crimson Eyes * ''Demo'' (Deafhea ...
, an event in which free samples of a product are distributed * Externality * Loss leader, for an item that is sold below cost in an effort to stimulate other profitable sales * Opportunity cost *
Product bundling In marketing, product bundling is offering several products or services for sale as one combined product or service package. It is a common feature in many imperfectly competitive product and service markets. Industries engaged in the practice ...
, offering several products for sale as one combined product * Product churning, selling more product than is beneficial to the consumer *
Promotional merchandise Promotional merchandise are products branded with a logo or slogan and distributed at little or no cost to promote a brand, corporate identity, or event. Such products, which are often informally called promo products, swag (mass nouns), tchot ...
*
There ain't no such thing as a free lunch "There ain't no such thing as a free lunch" (alternatively, "There is no such thing as a free lunch" or other variants) is a popular adage communicating the idea that it is impossible to get something for nothing. The acronyms TANSTAAFL, TINSTAA ...
(TANSTAAFL) *
Trojan horse The Trojan Horse was a wooden horse said to have been used by the Greeks during the Trojan War to enter the city of Troy and win the war. The Trojan Horse is not mentioned in Homer's ''Iliad'', with the poem ending before the war is concluded, ...
*
Vendor lock-in In economics, vendor lock-in, also known as proprietary lock-in or customer lock-in, makes a customer dependent on a vendor for products, unable to use another vendor without substantial switching costs. The use of open standards and alternat ...


References

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