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 razors, 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.
As long as he had patent protection he kept the prices high; when he lost patent protection he lowered prices.
And increased sales and profits.
The ‘sell the razor cheap and make money on the razors’ model is really not true at all but has become a standard narrative. Truth is not as important as the narrative, it seems. we do like our stories.