Innovating Around the Classic Razor-and-Blades Pricing Model

Innovating Around the Classic Razor-and-Blades Pricing Model

April 2017 | By Anirudh Dhebar

Estimated reading time: 11 minutes

Key Takeaways

 
  1. Companies across many industries have long used razor-and-blades pricing as a strategy to lock in consumers through a variety of technical, financial, and behavioral mechanisms, and, having locked the consumers in, to make superior margins on a multiperiod stream of consumable sales.
  2. Numerous forces—social media, better informed customers, a growing openness to open standards, disparities among societies regarding respect for intellectual property rights, and long and information-leaking supply chains—are increasingly calling into question the tenability of razor-and-blades pricing.
  3. There is increasing opportunity to disrupt the razor-and-blades pricing approach through innovations in, for example, financing (as opposed to pricing), value proposition, and/or value delivery.

Introduction

In August 2015, Epson introduced an “EcoTank” printer series with a tank large enough to hold a two-year supply of ink. The new printers, offered at a relatively high price, broke from the industry practice of offering the printer, a durable “razor,” at a low price, and making up for the lost contribution with a high price for frequently replaced ink cartridges, the consumable “blades.” This article, which draws on the piece “Razor-and-Blades Pricing Revisited” by Babson faculty Professor Anirudh Dhebar (Business Horizons [2016], 59, 303-310), reviews the motivation behind and the practice of traditional razor-and-blades pricing. Next, it explores why, given today’s consumer and contemporary trends in technology, marketers might benefit from a fresh look at razor-and-blades pricing. Finally, it offers examples of innovation departing from traditional razor-and-blades pricing.

The Rationale For and the Practice of Razor-and-Blades Pricing

The phrase razor-and-blades pricing owes its origins in the men’s grooming industry: Consumers are enticed to purchase a razor at a relatively low price, they are then “locked in” through the mechanism of proprietary blade technology and/or razor-blade interface, and the razor-maker reaps a more-than-compensatory stream of multiperiod benefits from large margins on relatively high-priced blades.

Effective consumer lock-in often is achieved through a mix or one or more mechanisms:

  • Proprietary interface: The most obvious enabler of effective razor-and-blades lock-in is a proprietary interface that allows only one model of a particular brand of consumable (the blade) to connect to and function with one model of a particular brand of a durable product (the razor). Not only may such an interface be patent protected, it must be implemented so there is no easy or effective customer work-around.
  • Contractual terms: A second way to lock in consumers is through a high-exit-cost contract committing them to the continued purchase of a particular model and brand of consumable product or service in return for an initial subsidy on the durable component of a razor-blades system. Mobile-phone plans of a not-too-distant past are a case in point: One could acquire a highly subsidized mobile handset (sometimes, at a price of zero), but with a two-year commitment to stay with the mobile operator and pay (a relatively high) monthly service fee.
  • Consumer emotions (positive): The consumer may develop positive associations with a particular brand of the durable product and, having done so, may choose to stay with the associated brand of consumables.
  • Consumer emotions (negative): Then, there is the negative emotion serving as an underpinning to consumer lock-in. Here, the razor-and-blades supplier institutes mechanisms, practices, and anxiety-producing warning messages designed to make consumers stay locked in out of fear—fear, for example, of failing an “authenticity” check (the supplier runs tests, at times without the consent of the consumer, to see if the blades being used are “authentic”) and, as a result, possibly losing functional compatibility and/or warranty protection.
  • Consumer behavior: The razor-and-blades provider may offer consumers the credit-card-number-on-file convenience of automatic reordering and replenishment. The marketer’s gain from the consumer’s convenience: consumer-inertia-based reticence to switch once registration records are set up, and, coming out of the resulting consumer lock-in, greater insensitivity to the pricing of consumable blades.

Razor-and-blades pricing works best in the following circumstances:

First, the whole point of keeping the price of the durable hardware low is to create incentives for the consumer to commit to purchasing a future stream of consumables. The incentives may work for one or more of the following reasons:

  • Consumers may need to experience a new razor-and-blades combination before they are convinced of the benefits, and a low initial outlay encourages the consumer to try out the razor and blades pair.
  • Especially in the case of new product categories, the pragmatic (early majority) or conservative (late majority) consumer may be hesitant to try something new, and a low initial outlay reduces the consumer’s risk.
  • The consumer may have a limited budget, and a low price for the durable component makes the initial purchase affordable.

Second, the razor-and-blades pricing supplier must have the operational capability and the financial wherewithal to sustain the customer lock-in and the initial-subsidy pricing model over a period of time. Otherwise, the whole razor-and-blades pricing model will come to a quick and sorry end.

Third, it is helpful if the practice is motivated not by short-term tactics but by long-term strategic intent. Three strategic-intent motivations immediately come to mind: (1) To provide a strong support or driver for a complementary product or service business. (2) To reinforce product bundling and counteract any consumer tendency to mix and match brands consistent with their own (but not the razor supplier’s) interests. (3) To win platform standards wars—this, in an age when many minds are focused on extracting maximum advantage of installed-base-driven network effects. All three motivations play a role in the current high-stakes fight being waged between tech industry titans Amazon, Apple, Google, and Microsoft over voice-assisted devices and services. Consider the case of Amazon and its strategic game behind its voice-assisted Echo speakers and Alexa, the system’s underlying artificial-intelligence-driven voice service. Conceivably, Amazon may be subsidizing the pricing of the Echo “razors” and making Alexa available at zero cost to other device makers, all in order to drive margins from future streams of content and retail merchandise (the “blades”) sales resulting from the use of the Amazon Echo and of Alexa.

Fourth, the competitive context—especially in the consumable “blades” space—must support the subsidy-now-more-than-made-up-by-high-margins-later pricing model; otherwise, unfettered price competition in the “blades” market may not support the high margins necessary to make up for the initial price subsidy on the “razor.”

The Case for Revisiting Razor-and-Blades Pricing

I began this article with a reference to the Epson EcoTank’s break with the inkjet printer industry’s traditional razor-and-blades pricing practice. Given the state of business today, is there a case for others to revisit the practice of razor-and-blades pricing?

Answering this question, let us suppose the razor-and-blades marketer’s choice of razor-and-blades pricing is informed by strategic intent and the marketer has the operational capability and financial wherewithal to sustain such a pricing practice. Is razor-and-blades pricing tenable in today’s world?

For an examination, let us turn first to the mechanisms often used to achieve consumer lock-in:

  • Consumers locked in via a proprietary interface: There was a time when marketers could credibly convince consumers of the technical, functional, and quality-motivated necessity for proprietary interfaces between razors and blades (for example, Nintendo gaming consoles and their proprietary interface for connecting with compatible videogame cartridges). Present-day consumers, deeply immersed in social media, are much more suspicious of the marketer’s intent, and can be forgiven for believing that proprietary razor-and-blade interfaces are not always the result of technical consideration but mechanisms artificially contrived to prevent consumers from bolting. These conspiracy-minded consumers do not hesitate voicing their suspicions and charges on social media, and the more adventurous among them will see proprietary interfaces as an open challenge for workarounds and hacking. All one has to do is search for how to jailbreak an Apple iPhone, and a rich list of how-to guides will pop up on the browser.
  • The contractually bound customer: Earlier, we saw how consumers may be locked in through a contractual commitment to a certain time period of repeated consumables purchases in exchange for a subsidized durable product. Even when such contracts are legally enforceable, enforcement costs can be high (both financially and in terms of public relations) and competing providers keen on making money from the sale of consumables may be willing to entice the consumer to walk away from a contract by offering to pick up the tab for any premature contract exit penalty. We see evidence of this in the mobile-phone space with mobile operators offering all kinds of deals to lure away competitors’ customers.
  • The (positively) emotionally locked-in consumer: A strong brand can emotionally lock in consumers. Fair enough. But, if the brand is so strong, why offer a subsidy on the durable module of the durable-consumable pair in the first place? Apple, whose brand ranks above its peers among its fans, offers both the razor and the blades at a high price, famously making far more than average industry profits from its iPhones and from its apps and other content. No need here of razor-and-blades pricing.
  • The (negatively) emotionally locked-in consumer: If brand is one way to emotionally lock in consumers, fear is a second way. Fear may be an effective lock-in mechanism, but is it a good one? Disgruntled customers may (gladly) bolt to a competitor given half a chance and bad-mouth the experience on social media.
  • The behaviorally inertial consumer: Many consumers are locked in to consumables purchases because of inertia. Consumers locked in because of inertia will not be strong advocates of the brand, and when they finally do overcome their inertia, they may very well move to some other offering. As with consumer lock-ins based on fear, inertia-based lock-in may be effective but is not a basis for compelling, value-driven marketing.

Next, let us focus on the practice of offering the durable “razor” at a subsidy in order to help consumers overcome any uncertainty about benefits. The stratagem, often practiced in the case of new, untried “razors,” may have been appropriate in the past. Today, there is a non-price way to assuage consumer anxiety, and that is to help better inform the consumer through the use of social media and other forms of internet-based information and advice.

Finally, changes in competitive contexts and modern-day supply chains also call into question the continuing practice of razor-and-blades pricing. A lucrative market for “blades” invariably will attract competitors eager to raid customers after some other player has gone through the hard work of building an installed base of razor users. We see an example of this in the case inkjet cartridges: search the internet for replacements for the Hewlett-Packard inkjet cartridge, and a number of non-HP providers will pop up offering their wares at a discount compared to Hewlett-Packard’s prices. Given a certain disregard for intellectual property rights in some parts of the supply chain, and given the right economic incentives, it would not be unusual for engineering drawings, bills of materials, parts, and process know-how to leak—and for parties to pop up on the internet with offerings of competing (and compatible) blades at prices low enough to seduce the most resolute of consumers.

Opportunity for Non-Razor-and-Blades Pricing Innovation

The above discussion suggests the need for razor-and-blades providers to take a fresh look at their adoption of the traditional practice of razor-and-blades pricing and be open to other ways for achieving success in the marketplace. At least three innovation possibilities come to mind.

A change in pricing and the purchasing arrangement

There is an alternative to initial price subsidy for making the durable “razor” more affordable: for the razor-and-blades provider to offer a financing arrangement that spreads the initial (unsubsidized) purchase price out into smaller and more manageable installments. Not only does this create a welcome transparency in the price of the both razors and blades, it avoids the need to build in (real or artificial) consumer lock-ins—lock-ins that may make consumers resentful. We see this alternative taking hold in the mobile-phone space: Gone for the most part are initial subsidies on handsets in return for two-year contracts; they have been replaced by outright handset purchases, albeit with financing provided by the operator.

Redefining the value proposition

The new Epson EcoTank printer would be of particular appeal to a segment of consumers willing to pay high up-front prices for an inkjet printer that holds a two-year supply of ink and avoids the hassles and anxieties possibly associated with printers running out of ink at the worst possible of times—the middle of the night with a child’s homework or an office report due the next morning. In other words, the new printer not only deviates from the razor-and-blades pricing model, it also redefines the value proposition. The strategy represents a product and business-model innovation that is competitively differentiating while avoiding the modern-day pitfalls threatening razor-and-blades pricing.

Redefining value delivery

Finally, there is the opportunity to abandon razor-and-blades pricing and, instead, focus on redefining value delivery. In a world of increasingly look-alike products, what often sets providers apart is the customer experience. If this experience is compelling, so, too, will be the value delivery. And, as Apple has repeatedly shown, a singular focus on the consumer’s experience, whether at the level of the product and its use or a visit to the Apple store, can obviate the need to resort to initial price subsidies for the durable product or customer lock-ins for consumable purchases.