A Disruptive Razor Blade business strategy used by Gillette, Nestle and HP

How companies like HP, and Apple sell their core product at a cheaper price and earn money by selling refills.

The razor blade business model is Widely used in hardware items where one item is sold at a low price or at losses and generates profits from refills and add-ons.

Example: HP Printer, Gillette Razor, Nestle coffee machine etc

Razor and blades model Examples

1. Coffee Machines: Nespresso coffee machine can only be used if you purchase the cups from Nespresso
2. Razor blades: If you are buying a Gillette razor then you have to buy the brand’s expensive blades with it.
3. Electric toothbrushes: If you are buying an electric Toothbrush you need to put the same Toothbrushes every month.

This business model was first started by Gillette where they figure out that selling one razor is a lousy business but selling a lifetime of blades makes a lot of sense.

One of the advertisements of Gillette in the early days.

They sold 51 razors and 168 blades in the first year and 90k razors and 123k blades in the second year followed by 450k razors and 70 million blades.

Gillette sales for the first few years.

Gillette realized that they could sell razors at loss and make money by selling a lot of blades.

Hence, they were able to sell something repeatedly which is far more profitable than selling something once.

Razor blade as a business model

So basically you take an existing product such as a coffee machine and design the cups in such a way that they can only be used for your machine.

There are several benefits to using the razor and blade business model.

1. Recurring profit: Post first purchase they need to keep buying the cheap basic product (bait).
2. Loyalty: Customers tend to be more loyal to the company since they’re locked into the system.
   Once they are hooked then you make a profit on the premium refills and add-ons.
3. Higher margins: The base product is usually sold at a loss, while the add-ons are expensive and sold at higher margins.
4. Good upselling and cross-selling opportunities: For example, a company selling razors can sell a premium range of blades or other products like shaving cream, aftershave, etc.
5. Stable earnings model: Selling enough of the core product will stabilise earnings.

Problems with Razor blade business model (With example)

1. Make sure you have a killer Core product

If you remember the $699 Juicero (First-home cold-pressed juicing system) where you have to use their own $5 juice packs.

Juicero and the Juice packs

Some online videos proved that you could get the juice simply by hand squeezing the suddenly the $700 machine became useless.

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