Friday, September 25, 2009

The Razor and Blade Business Model

The razor and blade business model (or "tied products model") is based on providing durables that can only be used in combination with, and are unusable without, complementary consumables. The purpose is to tie a customer to an ongoing stream of supplies over time. In the basic form a durable is sold at a discount or given away for free, while the dependent consumables are sold with a considerable higher margin recouping lost profits.

Examples of tied products:
  • Printers and ink cartridges
  • Mobile phones and air time
  • iPod and iTunes
  • Free computers with tied Internet services
  • Pdf readers and PDF tools
  • Cameras and interchangeable lenses
  • Instant cameras and film
  • Game consoles and games
  • Electric toothbrushes and brush heads
  • Coffee machines and coffee pods
Open or Closed System
Different control mechanisms, such as trademarks, product design, design protection, patents and contracts are often used in combination to control the compatibility from other companies' products. Depending on the competitive setting, the developed control position and chosen business strategy, the company offering both durables and consumables can either compete or be a monopolist in the market for durables and/or consumables. This creates four simplified razor-and-blade models:
  • Monopolist in durables, monopolist in consumables (Polaroid camera & Polaroid Films)
  • Monopolist in durables, competition in consumables (iPod & iTunes)
  • Competition in durables, monopolist in consumables (Razor & Blades)
  • Competition in durables, competition in consumables (Senseo Coffee maker & Coffee Pods)
With strong value propositions and strong control mechanisms, a company may have the choice to keep the durables and/or consumables, closed or open in various different ways such as "free for everyone to manufacture and sell", "free in certain geographic regions", "free for licensees signing away certain rights", "license to manufacture and sell with royalty", "license to further develop the technology and IP with grant-backs" etc.

Why allow competition?
Companies may for various reasons choose to allow competition and allow customers to choose durables or consumable offered by a competing or complementary firm.

One such example can be in the case of value propositions with network externalities, i.e. when the increasing number of users increases the value of the value proposition for each customer. (The more people that own telephones, the more valuable the telephone is to each owner). One classic example is the Betamax versus VHS videotape format. Sony lanched its proprietary videotape format Betamax in the 1970s, controlling both recorders and videotapes, and got an early lead but flopped when several other electronics companies formed a strategic alliance to offer the alternative VHS standard, creating and sharing a bigger pie.

Another reason to open up either the durables or the consumables for competition can be if the customers demand variety when purchasing a product. To take the coffee machine example, you could take the approach to have a closed system and provide all pods yourself (Nespresso) or have an "open" system allowing other companies to provide a variety of different brands on coffee pods (Philips' Senseo).

Gillette's Razors and Blades - The classical example
The name Razor and Blade business model refers to Gillette's use of razor handles, sometimes given away for free, and high margin disposable blades. Gillette has used the razor-and-blade business model since the first model with disposable blades was launched in 1902, with granted patents in 1904. Since then several different generations of razors have been developed, patented and released and razors has become one of the most heavily patented consumer products with more than 1000 granted patents. Gillette's success with its razors and blades is a story about superior technology, design and the use of control mechanisms, foremost patents, to ensure market dominance.

Gillette who spends huge amounts on R&D and patenting, has fine tuned its business model and patenting activities, and never releases a new razor until the next generation is already in development. It has continuously developed and heavily patented its products, replacing old models just when patents have started to expire. As patents per definition becomes publicly available, and is used for competitive intelligence, Gillette, instead of filing own patents when inventions are discovered, awaits the right time to file large batches of patents to be published in perfect timing for the launching of new products.

In 1998, after more than $750 million of research and testing, Gillette introduced Mach3, with innovations such as the triple blade, the single-point cartridge docking, the indicator lubricating strip to signal when to replace cartridge and the diamond-like carbon-coated DLC blade edge (three times stronger than stainless steel, made with chip-making technology). The company made sure to patent every design and engineering feature resulting in a wall of more than 50 patents surrounding the product. Seven years later the Gillette Fusion was launched with new inventions protected by more than 70 patents.

The Reverse Razor and Blade Model
When consumables are sold at low margin and durables at high margins (e.g. iPods and songs) the model is sometimes referred to as the Reverse Razor and Blade business model.

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