Gillette’s Famous Razor-Blade Business Model
Businesses may successfully establish their place in the market by implementing distinctive and inventive marketing and pricing strategies. You may very well have noticed the pricing trends and patterns established by businesses and corporations in order to market their products and services. For example, the Price Skimming Technique — in which the company sets the price as high as possible and then over time gradually lowers the price. Another strategy you might have come across is that of the Market Penetration Technique — which is the polar opposite of the Price Skimming strategy. The products are priced lower in the market, and as time passes and the product has established its position in the market, the brand abruptly increases the pricing of its products and services. Like these, there are several different types of pricing strategies adopted by organizations.
However, in today’s Business Acumen, we will look at a rather century-old, one-of-a-kind, never-before thought of pricing strategy that has kept the founding company in the market for over a century.
I am talking about none other than Gillette — the world-famous, monopolised brand of safety razors and other personal care products. Gillette’s renowned Razor-Blade Pricing Business Model is an exemplary case study to learn.
This pricing model set a benchmark in the marketing world and gave the world a billion-dollar idea; And this concept laid the groundwork for some of the world’s most successful companies, including HP, PlayStation, X-Box, Kodak, and even Amazon. Let us first understand the history of Gillette in brief before understanding how this pricing business model came into implementation.
HISTORY OF GILLETTE
This was the era where the clean shaved moustache trend was on a rise. We are talking about the late 1800s. Back then, shaving was considered a difficult and very dangerous task. This was because there were only 2 options you could choose from while shaving.
- A Straight Razor — You might still see the straight razors in local barbershops. They have a sharp blade edge and people are often scared even to get their neck or face near them.
- A Safety Razor — This type of razor was a one time purchase. They were designed in such a manner that once you bought them, you needed to sharpen the blade of the razor frequently for reuse. This process was very tedious and time-consuming.
One fine day, this irksome and inconvenient technique as well as the use of this life-threatening razor frustrated a travelling salesman. This stimulated his thinking process and that is when he came up with an idea that no one else had ever thought of before. The idea was to create a detachable and disposable razor blade that can be thrown away after every shave and can be replaced by a new one. This angry salesman was none other than King Camp Gillette himself. His revolutionary vision and invention of disposable blades, radically altered men’s grooming habits.
King Gillette along with his friends — William Emery Nickerson and John Joyce, took nearly 6 years for finalizing the disposable blades and razors concept into a functioning model and drawings that could be filed to the patent office.
This patent meant that nobody could touch or copy Gillette’s design for the next 15 years. And for the next 15 years, Gillette imprinted itself on the global map of men’s grooming products by becoming the market leader and gaining revenues in millions of dollars.
AFTER-EFFECT IN THE YEAR 1921
In 1921, 15 years after the expiration of Gillette’s patents, every single Gillette competitor began producing pairs of razor blades that were similar to those of Gillette. This created a problematic scenario for Gillette, and the outcome was visible in their sales. In just one year, sales of Gillette razors saw a massive plunge of 20%. And this was the time for them to perform a miracle in order to keep the company from going bankrupt. And it was at this point that they devised a pricing strategy known as the Razor-Blade Model.
THE RAZOR-BLADE PRICING MODEL
King Gillette’s Razor-Blade Model was based on a simple philosophy wherein they said — Let us sell the Razors at quite a cheap price with low margins, and then sell the Blades at a much higher price to cover up the margins. The customers’ mindset would be to keep buying new disposable blades every time, and this might keep the profits recurring for Gillette from each of its customers.
In layman terms, Gillette said — “Give them the Razors and make them come back for more Blades.” And then, Gillette started selling their razors at an ultra-cheap rate to compete with their competition.
And within a year, Gillette’s sales skyrocketed by a huge margin of 127%. It just took them 1 year to get back into the market and to reestablish their brand name and product. This is how Gillette set a benchmark for pricing products skilfully, and even a century later, this model still serves as an inspiration for some of the most iconic companies in the 21st century.
COMPANIES USING THE RAZOR-BLADE PRICING MODEL
Gillette’s Razor-Blade Model by far has been used by many top brands to sell their products and imprint themselves in the global market. This very own pricing system inspired the concept of “Freemium.” In this pricing model, for example, digital items and services (such as software, email, games, or messaging) are given out for free with the anticipation of subsequently profiting from upgraded services or extra features.
Let us look at a few brand examples where the companies have implemented the Razor-Blade Pricing Model.
A. Sony/Microsoft —
Multi-billion dollar companies such as Sony and Microsoft sell their gaming consoles — Playstation & Xbox — at a very cheap rate. They even incur huge losses by selling these products at such a low price. Instead, they earn their recurring profits by selling CDs and subscription plans from their customers.
B. FUJIFILM/Polaroid —
We all might have seen the famous Instax Fujifilm camera & the Polaroid camera which are leading, instant still camera-makers that generate clicked photographs instantly using a colour film. These films are the source of recurring profits for these brands. They sell their cameras at a lower price and let the customers come back for getting more films.
C. HP —
Hewlett Packard sells their Printers at a cheaper rate. This helps them in converting their target audience into buyers of their products. They then sell their ink cartridges at a higher price forcing their consumers to buy them for the printers to operate.
D. Amazon Kindle —
The Kindle device built by Amazon is very cheap to buy. But what gives them the profits are the e-books and the subscriptions they provide after the consumer buys their product.
E. Apple —
Apple used to sell iPods & iTunes at a cheaper rate. Beyond the hardware revenue, Apple used to provide their customers with additional supported applications, music albums and other services for these devices for a hefty cost and gain much more in sales revenue.
