Many of us have heard about the ‘Razor-And-Blades’ (R&B) also called the ‘Loss Leader’ business model created by King Gillette in 2002. This marketing strategy was created as an aggressive pricing method used to sell razors for free to stimulate demand for blades instead.
Since its creation, many companies have implemented this technique into their business models but as more innovative technology surfaces and consumers move towards a digital economy, is this strategy still profitable?
The Profit Methods of Today: Upselling and Cross-Selling
Eric Savitz highlights in Forbes Magazine two major forms of profiting with the R&B business model today; through upselling and cross-selling. An example of upselling is Amazon’s Kindle Fire. Many price analysts agree that its cost of $159 is below cost yet Amazon has sold millions of these devices knowing that it would serve its purpose as a “virtual store window into its large collection of goods, services and content.” Amazon understands that those customers who purchase a Kindle tend to become loyal amazon users long-term. Additionally, software publishers are leveraging more than ever this method by offering limited or advertising-supported versions of their products (such as free app versions) in order to entice consumers to purchase ad-free and feature-rich versions.
Cross-selling is also an important profit method used in the Digital Era. As more customers are opting for using free trials before purchasing, vast amounts of data is being captured and advertising correlations are forming. With this information, companies can now improve their platforms, target the correct market through advertising and even create new compelling offers.
Challenges of R&B today
There are three main challenges; relentlessness, demand for variability and resistance. Due to its high elasticity and competitiveness, this pricing model faces marketing pressure to deliver high quality low-margin products which, if not executed properly, can result in overall profit loss and no ability for markup. The market can also vary constantly due to this model which often results in loss of control and defining its target market. Lastly, more customers are resisting the need to purchase a free product since they know they will have to purchase additional features in the future in order to fully enjoy the product.
Upcoming Implementation: R&B Model of the Future
Throughout this post, I mentioned the benefits and challenges of the R&B model in our Digital Era but I wanted to point out its feasibility to revolutionize industries in the future as well. As an example, I will use the gaming industry. The new gaming console launched at the end of this year, the PS5, will have a price point of $499 which many price analysts consider the price point to “take losses on each console sold.” When considering the potential profit from this product long-term, the console price makes sense as Sony will recoup the cost through subscription and software sales. As an example, for every game sold, Sony retains a platform loyalty fee (of about $7) as well as a publishing fee of about $27 for first-party games. This same concept applied for XBox. The potential profit is unimaginable! Who knows? Maybe game consoles will become the new razors, whilst software will be the new blades of the future.
Anderson, Chris. (February, 2008). “Free! Why $0.00 Is the Future of Business.” Wired. Site URL https://www.wired.com/2008/02/ff-free/?currentPage=all
Corporate Finance Institute. “Loss Leader Pricing.” Site URL https://corporatefinanceinstitute.com/resources/knowledge/strategy/loss-leader-pricing/
Savitz, Eric. (December, 2012). “Razor-And-Blades Pricing Strategies In the Digital Age.” Forbes. Site URL https://www.forbes.com/sites/ciocentral/2012/12/19/razor-and-blades-pricing-strategies-in-the-digital-age/#250a275c6e34
Simmons, Nathan. (September, 2020). “Rumor Claims XBox is Losing Money on Next-Gen Consoles.” SVG. Site URL https://www.svg.com/245401/rumor-claims-xbox-is-losing-money-on-next-gen-consoles/
Sun, Leo. (June, 2019). “Sony and Microsoft’s New Consoles Will Be Big Loss Leaders.” The Motley Fool. Site URL https://www.fool.com/investing/2019/06/18/sony-microsoft-game-console-big-loss-leader.aspx