Rafi Mohammed

The REAL Reason to Use the Razor/Razor Blade Price Strategy

Posted on February 9th, 2007 (0 Comments)

Why do companies use the razor/razor blade pricing model (price razors cheap, reap profits from expensive razor blades) for their products? Why can’t the razors be expensive and the blades cheap? These are the types of questions that keep me up at night.

Most commentators speculate that razors should be discounted because when making purchases, consumers focus on the initial razor price, not future blade prices. C’mon, do you really think consumers are that shortsighted? If so, we’d better take away the Nobel Prize that Robert Lucas, Jr. won for his work on rational expectations (which basically says consumers think about events in the future when making economic decisions). Of course, I’m sure some consumers do not think about the future, but I’d be leery about basing my price strategy on the hopes of this customer irrationality.

An interesting sidebar on Robert Lucas Jr.: when he divorced his wife in 1988, his wife included a clause in their settlement that if he won the Nobel Prize by October 31, 1995, she would be entitled to 50% of the million dollar cash prize. Professor Lucas won the Nobel Prize on October 21, 1995…now that’s rational expectations!

I believe Ward S. Bowman best articulated the right way to think about the razor/razor blade pricing model in his 1957 Yale Law Journal article titled “Tying Arrangements and the Leverage Problem.” Interestingly, Ward’s article is one of the most cited Yale Law Journal articles ever published (in academia, a sign of peer respect is for your article to be cited by other academics). Let me illustrate Mr. Bowman’s theory with the following example.

Suppose you are an entrepreneur that develops a revolutionary inkjet printer. Like most products, you have a potential customer base with widely varying valuations for your inkjet printer. Customers range from low volume families that occasionally print vacation pictures to high volume businesses printing fancy color presentations for their clients. One inkjet printer…a wide spectrum of customer valuations (sound familiar? It’s a core principle of my book: lessons from an auction). One strategy to serve as many customers as possible and capture their differing valuations is to use the razor/razor blade pricing model. Price the printer cheap to attract as many customers as possible and charge high prices for inkjet cartridges. Low volume customers, which presumably have a relatively lower valuation for inkjet color prints, purchase fewer cartridges. Conversely, high volume customers, which presumably value your inkjet printer higher than families printing vacation pictures, purchase more cartridges. The result: you make more money from high valuation relative to low valuation customers. It’s a brilliant pricing strategy that captures the value customers place on your product.

Of course, this model is not limited to just razors and inkjet printers, it’s a standard pricing strategy. For example, Brita uses the same strategy for its pitchers and replacement filters. My sister and I both own Brita pitchers, but she drinks far more water than I do. As a result, Brita makes relatively more profit from her since she purchases more filter replacements.

So, while most of us understand the pricing associated with razor/razor blade model, few know why to use the strategy. Now you are all set to dazzle your pricing colleagues with the true reason to use this strategy…capturing different customer valuations (the ultimate goal of all pricing managers).

Have a question or comment, please feel free to send them to me! I update this blog two to three times a week – please consider signing up to be notified by e-mail of a new blog post.

Add Comment
Send to Friend
Email Signup
RSS Feed