So if you look at the price of a coffee machine or a printer, you will soon realize that the company
is selling these product at a loss.
I mean, their hardware cost is much lesser than the price.
But why these companies are selling these two product at a loss?
I mean, what's the strategy behind that?
And that's why to understand the reason behind that, in this video, we will discuss about a unique
pricing strategy called razor blade pricing model.
Now, this pricing strategy, or let's see, bait and hook kind of business model was first started
by Gillette, where they felt that selling a razor is a lousy business and that's why they started selling
these blades at a premium price.
So in the first year of business, Gillette sold 51 Razor and around 168 blades.
And if you look at the blades for Razor, they sold around 3.3 blade per razor.
In the second year of business, Gillette sold somewhere around 90,000 razor and they sold one 23,000
blades.
And if you look at the blade by Razor, they sold around 1.3, six blade by razor.
Now, after a few years, Gillette realized that they could sell these razor at a loss and still make
money by selling a lot of blades.
And that's why 11 year later, they sold around 450,000 razor and around 17 million blades.
And they were selling somewhere around 15.5 blade per razor.
And that's why people started using this razor blade pricing strategy in their business.
So the core idea of having a bake and hook kind of business model or let's say using a razor blade pricing
strategy, is that.
That selling something repeatedly is far more profitable than selling something once.
And that's the whole idea of using the razor blade pricing strategy.
Now, after Gillette, this kind of pricing strategy was also used by companies who were selling printers
and cartridges.
So they were selling all of these printers at a cheaper price and they were owning majority of their
revenue by selling these premium cartridges.
And today, this kind of business model is widely used by all these hardware companies where they are
selling their primary product or the core product at a loss, and they are generating majority of their
profit from all these free fills and add ons.
So if I give you a couple of example, you have.
Gaming console like PlayStation to printers, to a coffee machine like Nespresso, to even a juicer
like Cesaro.
Now, I know Juice Arrow already filed for bankruptcy, but you got the point.
These companies are selling their core product at a loss and they are generating a huge amount of revenue
from these expensive refills or add on.
In case of printer, these expensive refills are these cartridges in case of Nespresso.
They are selling their coffee bean and in case of juice arrow they were selling their cold pressed juice
packet.
But this company doesn't exist anymore so I'll not talk about that.
And you have so many different companies who still use this kind of pricing strategy.
Now, if you look at the price of a coffee machine, a coffee machine will cost you somewhere around
one $20.
But every time you make a coffee, you are basically using these expensive beans or let's say a session
of that specific brand and you are paying them almost a dollar.
Same goes with Gillette.
The razor will cost you somewhere around $7 and these expensive refills or blade will cost you somewhere
around $4.
And that's why on an average, a person end up using maybe 20 to 30 different types of blade on a single
razor.
So the main point is that you have to develop a unique product that will require some refill.
And then your main aim is to provide these refill conveniently to the end consumer.
And that's all about bait and hook business model, also known as razor blade pricing strategy.
Now let's talk about the advantage or the benefit of this razor blade pricing approach.
The number one advantage or benefit is that it will reduce the customer risk of trying out new product.
Now, because the core product in this case is not that expensive, so people can try out these different
types of product and if they are comfortable with that, they can buy these expensive refill and they
can start using it.
So it will reduce the customer risk of trying out these expensive product.
The second benefit of using this pricing strategy is that the brand will get the constant revenue from
the customer.
So let's say you bought our affordable printer and now you are using this printer every single day.
In that case, you will end up purchasing a refill in every two or three months.
So a company like Canon is getting the constant revenue from the customer if they are using the product.
And that's why they always try to sell you a less expensive core product like a printer, and they will
generate the massive amount of revenue from these cartridges.
Now let's take one product and let's discuss more about that specific product and how this strategy
can also go wrong if you don't use it properly.
So if you remember a $6.99 juice arrow, now that company was using a razor blade strategy where they
were selling the core product not at a cheaper price.
The core product was super expensive.
You have to spend somewhere around $700 to buy this machine and then you can use these individual refill
that will cost you somewhere around $5 and you can enjoy the cold pressed juice at your home.
So some guy posted a video on the Internet and that video proved that you can simply press these $5
juice pack and you don't really need a $700 machine in order to get cold pressed juice.
And suddenly this machine became useless.
And after a few years, the company filed for bankruptcy.
And there might be multiple reason behind the bankruptcy.
But I guess selling your core product at an expensive price can be one of the reason.
So if we talk about the pros and the cons of using the razor blade pricing model, the first advantage
is that the company can generate reoccurring profit.
So if you save, the customers are buying the core product like a coffee machine or a razor, they will
somehow end up purchasing these add ons or refills as well.
And that's how a brand can generate reoccurring profit every single month because somehow they are selling
their core product at a price point.
The second reason is loyalty.
Now, because people are using your core product, then there is a very high chance that they will still
use the refill or add ons of your brand.
Now some people can bypass that.
I mean, I've seen multiple people using a different coffee brand on a different machine and same goes
with these plate, but the probability is very less.
Now the third benefit is higher margins.
Now, the company might be selling their core product at an affordable price or maybe at a loss, but
they can generate a good amount of profit from these premium product or add on.
The fourth benefit is that these companies have a good upselling and cross-selling opportunities.
And we had a discussion about this in case of Dollar Shave Club, where the company started selling
their razors online, and then they started selling other products like aftershave gel or shaving cream
along with their razor.
So if your brand have a hero product and people love the hero product, then you will always have some
upselling and cross selling opportunities.
The fifth advantage of using the razor blade pricing model is that you will have a stable owning model
because you have somehow sold the core product and you don't really have to worry about your income
every single month or every single quarter.
If you are selling your core product, then people will buy all of these add ons or refill.
Now let's talk about a few things that you have to keep in mind.
If you wanted to avoid failure in case of razor blade pricing strategy or bait and hook model.
So at first you need to make sure that you have a basic product.
And you have to sell that product at an affordable price.
So if you look at a company like Arrow, their core product or their basic product was not good and
they were selling that product for $6.99.
And that's why you need to fix the quality of the core product and the price point.
So if you sell your core product at a loss, then you have to figure out the right kind of business
model so that you can make money on all of these add ons and.
Now, because you would be selling your core product at a loss, in that case, you have to figure out
a business model where you are selling all of these refills or add ons at a premium price.
Third thing you have to keep in mind is that you have to focus on the frequency and the distribution
of all these refills that you are selling.
So you have to sell these refill maybe every single week or every single month, but you have to figure
out the right frequency and the distribution channel so that you can sell all of these add ons and refill.