Saturday, May 3, 2008

The Razor Business Model

I remember when the Gillette Mach 3 razor came out. The company mailed me, free of charge, a Gillette Mach 3 razor consisting of the handle and one Mach 3 blade. Sure enough, I liked this razor but, upon buying refills, found out the Mach 3 refill razors cost twice as much as the older twin blades. Ouch. Further, the snazzy Mach 3 handle only accepts Mach 3 blades. Gillette is more than willing to give away the more expensive Mach 3 razor handle because, over time, they'll make their money on the high profit margin blades. As an aside, here's a ball busting hilarious spoof from The Onion on the Gillette v. Schick razor wars.

Some other products, you ask, following the razor blade model? My wife and I have allergies. Target and Walmart have cheap air purifiers with herpa filters. The things work great ... for three or four months, then you need a new herpa filter. Guess what? The little flimsy replacement herpa filter costs 1/3 the price of the entire air purifier unit. And only herpa filters fit in the unit. The profit margins on these little $15 filters has to be astronomical.

I'm sure many of you out there can relate to this one. My last auto purchase was a used BMW 528i. Couldn't believe the deal I got, $15,500 for a 1999 BMW with 80,000 miles (this purchase was made three years ago). Looked at many other vehicles and this was far and away the best value. The thing looks great, drives great, but a car made during the prior millennium is going to need repairs, no? Well where does one take a BMW for repairs? I'll tell you it ain't Carl's Auto Repair down the street. No, you have to take it to either a BMW dealer (the kiss of financial death) or a certified BMW repair facility. The friendly folks at Bimmers R Us who sold me the car happen to a BMW repair facility. They may not have pocketed much on my initial purchase but, believe me, these guys have made out hansomly on the subsequent repair work. I'm convinced the repair facility is the major profit center at Bimmers R Us. To put this into the parlance of the Gillette business model: the BMW is the the razor handle and the repair services are the razor blades. All the money is in the blades.

For you entrepreneurs out there, keep the razor blade strategy in mind next time you're putting together a startup. It's a winner!

No comments: