Posted in Marketing and Strategy Terms, Total Reads: 255
Definition: Razor Blade Model
A razorblade model is a pricing strategy that is based on selling a product at a lower price with an aim of generating sales revenue from repeated purchase of complementary products, which are necessary to support the functioning of the primary product. It derives its name from Gillette’s strategy of razor and blades, where the blades were sold at high prices, while the razor itself was sold at cost.
The complementary products are usually sold at higher margins to make up for the lost profits.
For e.g. Video game consoles are sold at relatively lesser prices, while the individual games and subscriptions are sold at extremely high prices per unit. Sales of printers and cartridges also work on the same model. Mobile phones are sold at loss making prices “under contract” with leading network service providers, where the main revenue for the network company comes from the repeated use of its mobile phone network by the consumer.
The razor blade model is susceptible to replacement of the high margin complementary products of the parent company, by third party/counterfeit products.
For e.g. a consumer may not necessarily keep on purchasing original HP cartridges for her HP printer, if local third party cartridges are available at a cheaper price.