Jayendra More · Follow
Published in · 8 min read · Oct 1, 2023
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We have already learned about what a Business Model is and how it works in our previous blog. If you have not yet read the blog you can go and check out the blog here. A business model is a mechanism for capturing value. It means that when a company creates value for its customers, it also aims to recapture a portion of that value for itself. So, essentially, a business model serves as a way to capture the value generated.
Welcome to the 7th edition of our business model series, today we will cover the Razor-Razor-Blade Business Model. One of the interesting business models that I stumbled upon during my search for a new source of income for my current business. Named after the “razor-razor-blade” model, which involves selling the razor handle cheaply or at times for free. The company then makes profits by selling replacement razor blades, which people need to buy regularly. Similar to the “razor-razor-blade” business model involves selling a main product (the “razor”) at a low price or even a loss and then making the majority of the profit by selling complementary products or services (the “razor blades”) that are necessary for using the main product.
The Razor-Razor-Blade model is when a company sells a main product (like a razor) cheaply or even gives it away for free. They make most of their money by selling related products or services (like razor blades) that people need regularly to use the main product. It’s named after razors and blades, where the handle is cheap, and the company profits from selling replacement blades over time. This model creates ongoing income by making customers rely on additional products or services. This model focuses more on the long-term usage of the product.
Main characteristics of the razor-razor-blade business model:
- Core Product(Razor)
The main product is usually sold cheaply, sometimes even at a loss, to get many customers interested. This can help in building a big customer group. - Complementary Product or Service(Razor Blades)
The company makes money consistently by selling things that are needed to use the main product, like accessories or services. These extra things usually have higher profits.
Here are a few examples of the Razor-Razor-Blade Model,
- Printers and Ink Cartridges: Printer companies sell cheap printers and make most of their money from selling ink.
- Coffee Machines and Coffee Pods: Coffee machine makers offer affordable machines and profit from selling coffee pods.
- Gaming Consoles and Games: Game console manufacturers sell consoles cheaply and make profits from selling video games.
You ask why is this model effective, the razor-razor-blade model is effective because it creates a recurring revenue stream from the ongoing sales of complementary products or services. It can also help build customer loyalty, as customers who own the core product are more likely to continue purchasing the associated consumables or services from the same company. However, it’s important for businesses to strike a balance between offering an attractive core product price and generating enough revenue from the complementary products to ensure profitability.
This model being unique in its own way works as follows,
Low-Cost Core Product (Razor)
The company sells a basic product (the “razor”) cheaply or gives it away for free to get lots of customers interested. (I know this has been repeated like a thousand times now 😅)
The Core Product Needs Other Stuff (Razor Blades) to Work Properly
The main product needs extra stuff (the “razor blades”) to function correctly. People have to buy these extras regularly. This helps the business roll the revenue.
Company Makes Money From the Extra Stuff
Even if the main product is sold at a low profit or sometimes even at a loss, the company earns most of its money from selling the extra stuff, which usually has higher profits.
Recurring Revenue Stream
The model makes money by getting customers to keep buying the extra stuff regularly, which creates a steady and predictable income for the company.
Balancing Profitability
To make this business model work, companies need to find the right balance between making the main product affordable to attract new customers and making enough money from the extra products to stay profitable.
In summary, the Razor-Razor-Blade model uses the continuous need for extra products to keep the business running and growing. It starts by offering a cheap or appealing main product to get lots of customers interested. At the core of this model stands customer loyalty, people who have the main product are likely to keep buying the extra stuff from the same company because it’s convenient, works well together, or they like the company.
This brings us to the most important question of the blog, how do we make money out of this model?
Offer an Affordable Core Product
Start by providing a main product at a low price or even for free to attract many customers. This helps in reaching a larger set of audience and maximizes acquisition. The cost at this stage is minimal and so are the profits.
Provide Essential Add-Ons
Offer complementary products or services that are necessary for the core product to function properly or stay in good condition. This helps in building a new branch of revenue.
Sell Complementary Items Regularly
Encourage customers to buy these add-ons on a regular basis, creating a steady income stream.
Profit from Add-On Sales
Make the most of your profits from selling these complementary items, even if the main product’s profit margin is low or even negative.
By following this model, you establish a reliable source of income based on repeat purchases of complementary products or services, ensuring the success and growth of your business.
When implementing the Razor-Razor-Blade model, there are several important considerations to keep in mind:
Pricing
Set an appealing core product price, not too low to avoid losses and not too high to ward off potential customers.
Quality
Ensure core product quality to build trust. Make sure that the product quality does not degrade with time.
Value
Complementary products must be valuable and essential. If the add-ons are not adding value to the product then customers won’t buy it.
Profit Margins
Keep complementary product profits healthy. Too low and your business might run into trouble.
Loyalty
Foster customer loyalty through quality and service.
Compatibility
Make complementary items work well together. Add-ons should take the usability one notch above the user’s expectations.
Marketing
Promote the complete product ecosystem. The core product and the add-ons.
Inventory
Manage inventory efficiently. Make sure you suffice the market demand.
Innovation
Stay updated and improve products. Always add new items to your arsenal in terms of core products or add-ons and complementary services.
Competitive
Stay competitive in pricing and quality.
Profit Balance
Keep the model profitable. It is easy due to competition to run into the grey area, so make sure profits don’t fall below an expected line. Stay positive always.
By considering these factors, you can make the Razor-Razor-Blade model work well, ensuring steady income and loyal customers.
Here are the main advantages and disadvantages of the Razor-Razor-Blade business model:
Pros of Razor-Razor-Blade Business Model:
Steady Revenue Stream
It generates a steady and predictable source of revenue through repeat sales of complementary products or services.
Customer Loyalty
Customers who own the core product are more likely to stick with your brand, fostering long-term customer loyalty.
Competitive Advantage
It can create a barrier to entry for competitors who might find it challenging to replicate the ecosystem of complementary products.
Profit Potential
The high profit margins on complementary items can offset lower margins on the core product.
Upselling Opportunities
It provides opportunities to upsell customers with a variety of complementary products, leading to increased revenue.
Cons of Razor-Razor-Blade Business Model:
Overreliance Risk
Vulnerable to changing trends. You need to constantly improve on the offerings.
Initial Losses
May lose money at the start. As the core product is not highly profitable, one can suffer initial losses.
Price Wars
Competitors might lower prices. If you are entering a market with old established players, entry becomes difficult if the competition lowers the value of their offerings.
Customer Resistance
Customers may not like being tied to one brand. So keep building new product lines.
Inventory Complex
Hard to manage supplies for all products.
Market Saturation
Tough to attract new customers.
Rules and Regulations
May face industry regulations. Depending on the industry, there may be regulatory hurdles.
The Razor-Razor-Blade model provides steady income and loyal customers but has challenges like initial costs, competition, and how customers see it. Companies should think carefully about how it fits their industry and products.
For a Razor-Razor-Blade model, several key metrics should be tracked to assess its performance and make informed business decisions. These metrics include:
Customer Cost
How much does it cost to get a new customer?
Customer Value
How much money a customer brings over time?
Churn Rate
How fast do customers stop buying?
Repeat Buying
How often do customers come back?
Profit Margin
The money you make from extras minus what they cost.
Average Spending
How much do customers spend in one go?
Inventory Turnover
How fast do you sell your stuff?
Customer Satisfaction
How happy customers are?
Market Share
How big your piece of the market is?
Complementary Sales
How many customers buy extra stuff?
Best Extras
What extras make the most money?
Customer Types
Different kinds of customers and what they like?
Cost of Making Extras
How much does it cost to make extra stuff?
Investment Return
How much money do you make from what you spend?
Inventory Costs
How much it costs to store your stuff?
Market Trends
What’s happening in the market and what do people like?
By keeping an eye on these numbers, companies can see how well their Razor-Razor-Blade model is doing, find places to make it better, and make smart choices to make more money.
Links to learn about other business models,
- Advertising Business Model
- Subscriptions Business Model
- Transactions Business Model
- Freemium Business Model
- Marketplace Business Model
- Razor-Razor-Blade Business Model
- Microtransactions Business Model
- Virtual Goods and Virtual Currencies Business Model
- Software As A Service (SaaS) Business Model
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