The Myth Of Razors And Razor Blades
from the debunking-the-conventional-wisdom dept
The story of Gillette and the famous "razors and razor blades" business model is legendary at this point. The story goes that King Gillette revolutionized business by coming up with the strategy of selling razors cheaply, but then locking people in to expensive disposable blades, where the margin existed. This strategy has become so well-known that it's mentioned all the time and seen in lots of other industries as well, especially the technology industry. It's seen as the basis for console video games (consoles cheap, games expensive), printers (printers cheap, ink expensive), mobile phone service (phones cheap, service expensive), etc.Of course, various business strategists who discuss the razor-razor blade business model suggest that there are some key rules to making this work: for example, many feel that there needs to be some level of lock-in, that prevents competitors from entering the high margin part of the market. That is, if someone else can just sell the high margin razorblades, then why would Gillette make the low margin (or negative margin) razors, since customers might just go elsewhere for the blades?
Well, it turns out that an awful lot of both the history and the theory turn out to be totally wrong when it comes to Gillette and the razor/razor blade market. Felix Salmon points us to Randy Picker's latest paper, which explores the myths of the razors-and-blades story as it applies to Gillette -- and the counterintuitive reality of what actually happened. I don't think the real story is quite as surprising or confusing as Picker makes it out to be -- other than the surprising fact that the common "story" we've all heard turns out to be wrong.
What Picker found, first of all, is that Gillette really didn't use the cheap razors and expensive blades strategy at all in the early years. In fact, it went the opposite direction, and charged an extremely high price for the razors. While other razors went for closer to $1, Gillette charged $5 for its razor (with a set of 12 blades). As Picker notes, this represented about 1/3 of a week's wages at the time, and made it a luxury item. While there were some convenience factors, other safety razors entered the market soon and charged a lot less than Gillette for both razors and blades... and Gillette kept its prices high.
And here's where patents enter the story.
Gillette received patents in 1904 on both the razor and the blade. As Picker notes, conventional wisdom would suggest that this is the perfect point for Gillette to have used the famed razors-and-razor blades strategy, since it could use the patents to exclude competitors from offering compatible blades. But, it did not. The same "conventional wisdom" would then argue that once the patents expired, and others could offer compatible razors, the razors-and-blades strategy would not work. And yet, it was after the patents expired and when there were compatible blades on the market that Gillette finally went to this form of strategy.... and its sales and profits shot up.
Picker suggests that none of this makes sense. He says without exclusion via things like patents, a razors-and-blades strategy shouldn't work, because there would be no lock-in on the platform (razors), and there would be competitors who would just offer the blades, undercutting Gillette, which would have to eat the costs on the cheap razors. Meanwhile, without the lock-in, users could just jump ship to a competitor at will, since the platform was so cheap.
I'd argue, however, that it actually makes perfect sense, the more you think about it. With patents, Gillette priced the razors (and, potentially, the blades) artificially high, creating a smaller, artificially limited market. This has long been our complaint with patents in general. Once the patents expired, and actual direct competition became more of an issue, then Gillette finally had to price to the market, capturing a much larger segment of the market, driving up revenue and profits because of it. As for why once the patents were no longer a serious issue, this strategy still worked, I think Picker underestimates both the value of brand loyalty and convenience, as well as mental transaction costs.
That is, even if others offer compatible blades for Gillette products, people are generally loyal to the overall platform brand if it hasn't done them wrong. Not everyone will be, of course. There will always be some pure price shoppers who look for the best deal. But many people will remain generally loyal to Gillette, and with more customers coming in due to market pricing, the net benefit could be much greater. On top of that, people don't want to have to worry about whether or not the blades will really fit or really work as well. They're likely to feel more comfortable going with the brand name that is the same as the razor maker, knowing that it will work, and that there's a level of quality involved. Choosing a different brand of blade involves risk and mental transaction costs that many users just won't want to bother with.
The whole thing is quite fascinating in thinking about these kinds of business models. Printer companies, especially, might learn a thing or two, as they've now become quite aggressive in using patents to block competitors from offering compatible ink cartridges or ink refills. But, the example of Gillette suggests they could be better off not fighting it, but focusing on providing better quality that doesn't annoy users quite so much.
Separately, I should also note that this is why I think that the classic (now, apparently mythological) Gillette razors-and-blades business model is not quite the same as the business models I suggest when it comes to infinite and scarce goods. That's because the classic Gillette story (as opposed to what really happened, apparently) would require lock-in. But the give away the infinite and sell the scarce setup is to not worry about lock-in, since that tends to piss people off, but rather focus on providing value so that people are comfortable buying from you -- which seems to be a bit closer to what actually happened with Gillette.
Filed Under: business models, patents, razorblades, razors
Companies: gillette
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not so much because of any product, i just hate shaving is all
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Thanks for the well researched article - TechDirt is rapidly becoming one of my favorite tech sites.
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Gillette
I think if you were to focus on the market conditions and specifics of the price model strategy and how it impacted the market at that time in history it would have been more compelling as we relate it to present-day economics.
Not to be a negative-nancy, I thought your post was a nice read =)
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Re: Gillette
Also disposible razors did not even exist for a very long time after the double sided disposible razor BLADES.
You used to use a NON-disposible razor, install your razor blades into them, and keep the razor, but throw away the blade. It was not until much later that disposible razors even existed.
So trying to compare those two different things, which did not even exist at the same time, when you are talking about it makes no sense.. But ofcourse, from Mike that is the normal SNAFU..
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Sorry. I wasn't saying the overall model is a myth. But that the founding story about it is a myth... *and* that the conditions some insist must be there to work are a myth.
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Another example
Apple and the iTunes Store's contents. When it came time for me to buy a new MP3 player, I didn't even think about getting a Zune, or some other brand, I went straight to the iPod. Why? Because I had tons of iTMS songs, and had become practically dependent on iTunes for organizing and managing my songs.
When my contract with AT&T was up, did I immediately switch carriers? No, I got an iPhone 3GS, traded in my 3G, and stuck with them, because I had over $100 in apps already purchased (seeing as how Apple still has the issue of "no refunds ever"). The only thing that got me to jump switch to Sprint and Android, was the $50/month price difference in plans, and the fact that Android has the 24 hour trial, and most apps are free!
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Re: Another example
Converting my own files was annoyingly slow and inconvenient and introduced audio sync problems etc., making the device essentially a $300 pay-to-rent movies box. I finally got some decent use out of the device when I hacked it to run XBMC which would let me play any format across the network, and enjoyed that tremendously until a problem with the remote/sensor kicked in.
I no longer have the device and have replaced it with a WDTV Live, which despite the slimmed down feature set, lets me play all my own stuff, in full HD without any conversions or need to hack the device. Apple continually tries to push the line as far back as possible, which is a shame, because their products would otherwise be hands down the winner.
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Re: Re: Lets think about this for a SECOND..
Why the heck would you put a battery in a razor? Please tell me it is unrelated to shaving.
Some people just need to buy a clue dont they, if they cant see anything in something, then NO ONE can. Luckily some in this world take a broader view of things, and do not see the world through the very narrow blinkers that we mostly see from this place.
As for this article Mike, you are all over the place, It seems as if you dont know what side to be on, or if there is even a side for you.
Razer blades were around much longer than disposible blades, so your comparison, (or whatever it is) is flawed from the start.
As for why the heck you would put a bettery in a razor.
Look up CATHODIC PROTECTION
Read a bit, you never know you might ever learn something.!!!! that would be a bonus !!!
I could not imagine living my life where I did not know how things work and how things are, I feel I would become bitter (like Mike and AC) and complain loudly about everything I did not understand.. what a sad life that would be...
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... power up to the Gillette Fusion Power Gamer razor with PowerGlide blades and gently pulsating Micropulses, allowing the blades to glide across your face with less razor drag and less shaving irritation
http://www.gillette.com/en/us/products/razors/fusion-gamer/gamer-manual.aspx
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The goose that laid the golden egg
As I studied the piece of history surrounding the creation of the company, I agree with Mike Mashnik. Indeed, the so called "razor and razor blade business model" was invented more "incidentally" that explicitly...
Whatever, it is more and more used... and my blog post is about the fact that some companies exaggerate and can kill the golden egg.. See also my market answer: http://www.razwar.com
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It was a good model
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I will say, though, I have a mondo beard. For years I tried razors and electric razors and all kinds of things to tame the damn thing. The Mach III came out and voila, it works great, not a single cut on my skin and the beard was tamed... for many years... I even tried knockoff versions of the Mach III and knockoff blades: nothing worked as well as the original.
So while it cost me a lot more, no generic brand was up to cutting my beard.
Of course, now it is moot, as I let it grow out this year.
ha! That'l show them!
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the flaw of this article
where i cant do the exact same thing with all these othr industries they dont give anyhting cheap nor of value and its why piracy as an example exists so massively in ip circles
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Razors as Metaphor
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Re: Razors as Metaphor
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Troll: One who posts a deliberately provocative message to a newsgroup or message board with the intention of causing maximum disruption and argument.
http://www.urbandictionary.com/define.php?term=troll
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Re: Razors as Metaphor
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Re: Razors as Metaphor
The SECRET is, The RCA COMPANY owned Major Armstrong's PATENTS on Superheterodyne Radio Receiver circuit, so they CHANGED the RAZOR BLADES to FOIL LITTLE BOYS from building FREE BATTERYLESS RADIO SETS in the 1950's!
When the WAVE of SOLID STATE, GERMANIUM "TRANSISTOR" RADIOS, using a GERMANIUM 1N34 Diode as DETECTOR and CK7488
and similar TRANSISTORS, requiring a 9 Volt Battery,
EVERY ONE WANTED ONE!
But ENTEREPOURnering LADDIES were PREVENTED from making FREE POWER, NO BATTERY Radios from DADDY'S USED GOLD BLADE!
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Re: Razors as Metaphor
I "retired" this year at 62 (= currently unemployed). I liked the riff on the "cheap cell phone, expensive service" idea. The "subsidized smart phone, expensive service" pricing model is for working people. My wife is a busy executive type, loves her iPhone. I, however, am looking for lowest cost basic service. I bought a low-cost Samsung phone at a Verizon store, and subscribed to their most basic prepaid plan: $15 per month minimum, 25 cents per minute. That may sound cheap, but I typically don't consume $15 per month.
My preference would be to pay (a low cost) only when I use the phone. When I was in the safety razor market, I could fairly easily predict how many blades I would use in a month or a year, so I could budget accordingly. But in the cell phone market, I can't predict how much bandwidth I will use, as I can go days or weeks without using it. I would rather not help to keep the service provider afloat with a use-it-or-lose-it set monthly fee. Let the high-end users subsidize the infrastructure cost, so that we bottom-feeders can pay only a small incremental cost for actual bandwidth consumption.
Other thoughts. My current cell phone setup has a very low annoyance factor. I have a credit card set to auto-renew, or to fund the account on those rare occasions when I consume all 60 minutes in less than one month. And I found it interesting that the e-readers (in my case the Nook) offer no-incremental-cost 3G service, as well as WiFi. It seems improbable that the cost of the wireless service is built into the cost of the platform. It suggests to me that there is a very low incremental cost for typical bandwidth consumption by the e-readers - an entire book takes a very short time to download. The payoff for the bookseller is that it's convenient, and cheaper, for me to buy an electronic book. There would probably be very little profit for Verizon to offer me true pay-per-use, unless they typically have lots of excess capacity on their system.
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I'm going to assume that paragraph was all about how much you hate formatting.
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TL:DR
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or artificial or hectic with so called developments !!
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(Ryan Zeigler, above, is correct).
You merely described long term changes in that market, as sellers & buyers adjusted to typical dynamic market conditions.
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re: razors
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mistaken
Heh Roseanna Danna, you are mistaken. Gillette did enforce his patents. In fact, he regarded the litigation as essential to the future of his company. The suit went poorly until his inside counsel took over the case. See KING GILLETTE: THE MAN AND HIS WONDERFUL SHAVING DEVICE by Russell Adams.
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Re: mistaken
Stevo, try reading in context next time. I didn't say that Gillette didn't enforce the patents. I was referring to the beginning of the sentence about how having the patents was the perfect time to use the famed "razors & blades" strategy.
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I too can make a blade last six months or so. Check out this link on sharpening your used, dull blades. It really works; I do it every week and have not bought blades for about two years.
http://www.ehow.com/how_5709307_sharpen-disposable-razor.html
Disposable razors are a total rip-off. I smile to myself every time I sharpen one of mine, knowing Gillette just lost a sale.
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1 Question
What happens when someone buys into a 4G wimax broadband plan and uses a smartphone?
Since most high end smartphones are capable of using skype or some other voice/video client, OR placing calls over a wifi / wimax network, does this mean that you can buy broadband and then bypass the telcos all together?
If so shouldn't someone be trembling in fear? (ok that was more than one question)
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I remember getting FREE razors in the mail
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Definately brand loyal.
My first razor was a Gillette. My current razors are Gillette's. I have the Mach 3 and it's battery powered successor. My next razor might be something different. I've noticed Gillette blades just don't seem to last as long as they used to.
So Gillette being a brand that's now not giving me the quality I'm looking for might well be a brand I'm about to leave behind.
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interesting fictional interpretation
In Makers he seems to say that if you provide a product that people use and enjoy using, you'll be really successful even if cheaper knock-offs come along.
I tend to agree. Looking at my own buying patterns, I seem to become very loyal to companies who make products that really deliver. On the other hand, when a company that I previously trusted starts to have some rather questionable practices (for example, Apple and their walled garden and other issues) I tend to react like a jilted lover with a great deal of resentment. For example, if there's a company whose products I loved and I found out they were doing something I found objectionable (say the quality dropped or they started really limiting my choices) I will not only stop buying from that vendor, but I'll make a point of letting other people know about my resentment. That's how a once-Sony-lover could become a Sony-hater or a once-Apple-lover could become an Apple hater.
In other words, note to corporations: Don't worry about tricky strategies to get people to part with their money. Just make really good products and don't do evil stuff. Simple route to success.
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Mental transaction costs
Enter Steam. I bought my first game on steam about two years ago now, and I've downloaded only three or four cracked games since--and played none of them for more than half an hour (so they would have been "wasted money" had I bought them). I realized something that Valve are doing really well: they're keeping mental transaction costs low. You know that if it's on Steam, it's generally going to work. You know that once you buy a game on steam, you have it forever, even if your harddrive fails. You know you'll get patches, automatically, not having to find them (or even make sure you download the right version of a patch). With piracy, there are mental transaction costs involved: do I trust this source not to put a trojan into the crack executable? Will this patch work with that rip? Will my friend, who got a different pirated version, be able to play with me?
It turns out not having to worry about these things is worth 50-60 bucks a game.
(Sorry this was OT as far as the Gilette model is concerned, but I found the concept of mental transaction costs very intriguing)
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The Cost Of The Blades
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Low barrier to entry
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More blades = faster gumming
I bought a little precision ground double edge that takes $1.67 for ten blades and the shave is so much better.
People are suckers, I "was" but I've seen the light. :)
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http://www.pinskylaw.ca/News/patents_for_startups.htm
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Razor Blades
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Wisdom in Marketing
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Opinion about the best shaving tools
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gillate
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