Razor Blade Business Model: Definition & Strategy

Instructor: Beth Hendricks

Beth holds a master's degree in integrated marketing communications, and has worked in journalism and marketing throughout her career.

The Razor Blade Model tends to give away or deeply discount a core product, with hopes that consumers will purchase the more expensive dependent products. In this lesson, we'll take a closer look at this business model.

A Razor Blade Strategy

Tom is a new resident of Huntington Beach and wants to get cable and internet hooked up in his new apartment. He calls a local provider, who promises him a great package that includes a free DVR to record all his favorite shows.

Except there's a catch.

That 'free' DVR will cost Tom not only an installation fee, but a monthly subscription fee to access all the DVR's features. Is this deceptive on the part of the cable company? Some may think so. But, really, it's just part of a business strategy known as the Razor Blade Model.

A DVR like the one Tom got
dvr machine

What is a Razor Blade Business Model?

The Razor Blade Model is a business practice where a brand either gives something away or sells it for a drastically reduced rate knowing that the purchaser is going to have to spend even more on dependent goods.

Let's go back to our example with Tom: what good is a free DVR without the monthly DVR service that goes with it? Yes, the cable company is giving Tom a free $100 DVR, but started charging him $20 per month to access the DVR's features. In just a few short months, the cable company will have recouped its $100 investment and will start making a lot of money from Tom's monthly fees.

The Origins of the Model

It may seem silly, but the Razor Blade Business Model is named that thanks to the real razor and razor blade industry. Attributed to razor manufacturer Gillette, the strategy behind the model is to sell razors for cheap, but sell the replacement blades at a premium price. After all, what would you do with a razor that doesn't have the compatible blades? You'll throw it in the trash, most likely. Businesses bank on you having a different reaction, however: that you'll bite at the low-priced razor and relent to purchasing the more expensive blades when needed.

Gillette razor blades, where the Razor Blade Business Model derives its name
razor blades from gillette

The Strategy Behind the Scenes

For businesses, offering a product that's generally a one-time purchase (think a DVR, a video game console, a coffee maker, or an e-Reader) does result in some financial loss. But, that money--and more--is recovered once a consumer purchases one of these products that requires future purchases (think a DVR service, video games themselves, coffee pods, or electronic books).

Not only do businesses stand to cover the cost of what they gave away, but typically far exceed it. For example, if you buy a video game system for $249, that's a pretty low price, right? The manufacturer could easily sell the system for twice that amount, but they don't. Why? Because they know they can charge $50-60 per video game and $25-50 for online subscriptions, among other add-ons. In no time, the brand has not only surpassed the amount of the system and the amount they could have charged, but turned a tidy profit.

Why It Works

Really, if you think about it, a brand who uses the Razor Blade Model is setting itself up for success beyond a one-off sale. Not only are they selling a coffeemaker, for example, but they know the end user will have to purchase the necessary coffee pods to actually use the coffeemaker. This secures a higher profit margin across the board for the brand, because the money to be made is in the coffee pods, not the coffeemaker itself.

Here are a few ways that the strategy works to suck customers in:

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