I've always wondered about this.
In a 1927 article on razor-blade counterfeiters, Time magazine stated the obvious: “as everyone knows, safety razor manufacturers derive the bulk of their profit, not from razors, but from the replaceable blades.” And this is just as clear today. In his 2009 business best seller, Free, Chris Anderson turns early to the story of King Gillette’s invention: “By selling cheaply to partners who would give away the razors, which were useless by themselves, he was creating demand for disposable blades. … Gillette made its real profit from the high margin on the blades.” Anderson closes the book with a coda and returns to Gillette: “Just as King Gillette’s free razors only made sense when paired with expensive blades, so will today’s Web entrepreneurs have to invent not just products that people love but also those that they will pay for.” The razors-and-blades strategy is a simple one: sacrifice returns— maybe even lose money—on the razor handle but make boatloads of profits on the blades. Razor handles are useless without blades and so razor makers had no reason to fear that customers would take free handles and never appear again.
But there turn out to be two central problems with this story: It doesn’t seem to work in theory and it doesn’t match the facts very well. Start with theory. If the razors are actually being sold at a loss—given away for free—then a better strategy seems clear: let the other guy sell the razors at a loss while you sell only the profitable blades. You don’t have to lose money on the razors if some other poor sap is willing to do so. Remember the money is in the blades. That suggests that low-prices for razors only make sense if customers are loyal or if the razor producer can block other firms from entering the blade market.
Moreover, giving away free razors doesn’t prevent anyone else from playing exactly the same strategy, if that turns out to be the winning one. You can’t lock in anyone with a free razor if someone else can give them another free razor. Indeed, all of this suggests just the opposite: if you want to create switching costs through the razor, the razor needs to have a high price, not a low one. High- priced razors mean that consumers face substantial switching costs if the alternative is to buy another high-priced razor. Think of switching from the Xbox to the PlayStation III. In contrast, users of free razors face zero switching costs if the alternative is another free razor. And even a high-priced razor approach to switching costs works only if everyone is playing that strategy: if another competitor is willing to give away its razor, then your customers don’t face substantial switching costs.
And you can’t lock them in through actual blade use, since once the blades are used, they are gone. The whole premise of razors-and-blades is that you get them to buy more blades after they have disposed of the original blades. Razor blades aren’t, to jump ahead in the story, say ebooks or computer macros, where use of the product generates a library that has a going forward value and one that might be forfeited if you switched platforms. You could lose your library of Kindle books if you choose to switch to a B&N Nook and your Lotus 1-2-3 macros are worthless if you want to move to Microsoft Excel. But there is no equivalent razor- blade stock that arises from use: once you have used the razor blades that you have on hand, you can easily switch to the new, free razor provided by an entrant…
The razors-and-blades story offers a foundational understanding of a key area of economics and strategy: Invest in an installed base by selling the razor handles at low prices or even giving them away, then sell the razor blades at high prices to justify the prior investment. Large chunks of modern technological life – from VCRs and DVD players to video game systems like the Xbox and now ebook readers – seem to operate subject to the same dynamics of razors and blades.
At least on the paper, the competitive dynamics of this situation are straightforward and well understood. If you actually give away the handle to create the installed base, you need to recapture those loses in the blade sales. And if you are selling blades above cost, you need to be able to tie the blades to your handle or you should expect entry in the blades business to compete on the base that you have installed.
That is at least the theory. The actual facts of the dawn of the disposable razor blades market are quite confounding. Gillette’s 1904 patents gave it the power to block entry into the installed base of handles that it would create. While other firms could and did enter the multi-blade market with their own handles and blades, no one could produce Gillette handles or blades during the life of the patents.
From 1904-1921, Gillette could have played razors-and-blades – low-price or free handles and expensive blades – but it did not do so. Gillette set a high price for its handle – high as measured by the price of competing razors and the prices of other contemporaneous goods – and fought to maintain those high prices during the life of the patents. For whatever it is worth, the firm understood to have invented razors-and-blades as a business strategy did not play that strategy at the point that it was best situated to do so.
It was at the point of the expiration of the 1904 patents that Gillette started to play something like razors-and-blades, though the actual facts are much more interesting than that. Before the expiration of the 1904 patents, the multi-blade market was segmented, with Gillette occupying the high end with razor sets listing at $5.00 and other brands such as Ever-Ready and Gem Junior occupying the low-end with sets listing at $1.00.
Given Gillette’s high handle prices, it had to fear entry in handles, but it had a solution to that entry: it dropped its handle prices to match those of its multi-blade competitors. And Gillette simultaneously introduced a new patented razor handle sold at its traditional high price point. Gillette was now selling a product line, with the old-style Gillette priced to compete at the low-end and the new Gillette occupying the high end. Gillette foreclosed low-end entry by doing it itself and yet it also offered an upgrade path with the new handle.
But what of the blades? Gillette’s pricing strategy for blades showed a remarkable stickiness, indeed, sticky doesn’t begin to capture it. By 1909, the Gillette list price for a dozen blades was $1 and Gillette maintained that price until 1924, though there clearly was discounting off of list as Sears sold for around 80 cents during most of that time. In 1924, Gillette reduced the number of blades from 12 to 10 and maintained the $1.00 list price, so a real price jump if not a nominal one. That was Gillette’s blade pricing strategy.
It is hard to know what to say about that strategy. If Gillette had finally understood razors-and-blades they might have coupled their new low-end razor with higher blade prices and the two changes coincide roughly. But the other event, of course, was the expiration of the 1904 blade patents and eventual entry of Gillette blade competitors. That should have pushed blade prices down and made it difficult for Gillette to play razors-and-blades. Indeed, even with the drop from 12 to 10 blades, by 1930, Sears was selling genuine Gillette blades for the price it had been selling them prior to the packet reduction.
And all of that gets us to the final irony. No razors-and-blades during the years of 1904 patents. With the expiration of the patents, Gillette no longer had a way to tie the blades to the handles and thus, at least on paper, seemed to have no good way to play razors-and-blades. Yet with sale of razor sets to the U.S. government during World War I and the jump in handle sales with the introduction of the low-price old-style handle, Gillette’s installed based jumped rapidly and the profits followed.
And that leaves a hole in the analysis. Gillette hadn’t played razors-and-blades when it could have during the life of the 1904 patents and didn’t seem well situated to do so after their expiration, but it was exactly at that point that Gillette played something like razors-and-blades and that was when it made the most money. Razors-and-blades seems to have worked at the point where the theory suggests that it shouldn’t have. Why is that? Did Gillette succeed because of quality or were their powerful even-if-hard-to-discern-now locks – psychological or otherwise – between the razors and the blades?
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