I’ve often talked about the importance of recurring revenue in this space, for example, in my columns here and here and here. But subscriptions are not the only way to achieve recurring revenue. A favorite example of business school profs is the razor-and-blades model. Sell customers a razor at cost, and make your money on the recurring purchase of blades.

The BBC’s Tim Harford recounts the origin story of the business model: King Camp Gillette invented the “safety razor,” in which the handle and blade holder were sold separately from the blade. Once you buy the handle, you can thereafter buy replacement razors. As Harford explains:

• Gillette’s blade led to a business model that has become ubiquitous in the modern economy. That model is called two-part pricing. If you have ever bought replacement cartridges for an inkjet printer, you may well have been annoyed to discover they cost almost as much as you paid for the printer itself. … Two-part pricing is also known as the “razor and blades” model, because that’s where it first drew attention — draw people in with an attractively priced razor, then repeatedly charge them for expensive replacement blades.

A Twenty-First Century example is Keurig Green Mountain, which makes Keurig coffee brewers and K-Cup coffee pods. Beth McKenna at the Motley Fool points out that the Keurig example illustrates both a strength and weakness of the business model:

• Keurig provides a great example of both how razor-and-blade business models can be extremely lucrative and how they can eventually stumble. Soon after Green Mountain Coffee Roasters fully acquired Keurig in 2006, the company’s business soared, along with its stock price. Consumers and businesses loved the convenience of Keurig machines and were locked into buying the company’s proprietary K-cups. However, once certain key patents on Keurig’s K-cups expired in 2012, competitors entered the market with less expensive coffee pods for the original Keurig brewers, and the company’s fortunes ebbed and flowed after that time.

(Source: Google Finance, via The Motley Fool)

Other examples of products getting the razor-and-blades treatment include soda and alcohol, sophisticated surgical equipment, and cutting-edge genomic-sequencing systems.

SUBSCRIPTION REVENUE IS MORE CONSISTENT THAN RAZOR-AND-BLADES

In the Wall Street Journal, Dan Gallagher points out that software companies have already transitioned from selling software in boxes to subscription services:

• Adobe used to make its money selling updated versions of Photoshop and other software. It now generates more than 84% of its revenue from recurring subscriptions to its suite of software and services. That has smoothed out its top line.

He is of the opinion that selling hardware by subscription may be next!

THE ADVANTAGES OF THE RAZOR-AND-BLADES MODEL ARE FADING

The entire point of the razor-and-blades model is to “lock-in” the consumer. It is a bait-and-switch mode of operation … bait the customer with a low-priced durable, then switch over to high-cost consumables. But consumer expectations and experiences in the Information Age undermine the olde tyme model.

1) Back then, pre-Internet, a razor-and-blades maker could count on customer ignorance about competing options. They could dominate consumer awareness with strong marketing and advertising in expensive (read, high-barrier) and low-bandwidth media. Nowadays, competing products and low-cost blades are just a Google search or a Facebook share away. It is easier now to find knock-off ink cartridges and K-compatible coffee pods. A business model that counts on limited consumer awareness of alternatives is a flawed one today.

That’s especially true in light of a 2017 Supreme Court decision that makes it harder for razor-and-blades companies to stop knock-off manufacturers of compatible consumables. The Washington Post’s Brian Fung reports that the decision makes it harder for companies to control what you do with products you buy after you buy them. You CAN refill your ink and toner cartridges, for example. The implications are huge, according to Fung:

• This debate over ownership is only getting more complicated as the world moves increasingly to digital goods, including subscription-based streaming. With apps like Spotify, for example, consumers are choosing to rent, not buy. The sprawling digital economy raises new questions for legal experts about access and ownership. “The next logical step will be for courts to recognize that people who buy digital goods are owners of those goods, not mere licensees, and can resell and tinker with their digital goods to the same extent as purchasers of tangible property,” said the Electronic Frontier Foundation.

That’s bad news for companies who try to control what consumers do with the things they buy.

2) Those olde-tyme companies could offer a razor product that would serve just fine for years, and require proprietary consumables for all those years. Today, technology evolves furiously, and products are upgraded or obsoleted quickly. Consumers expect better, newer versions, and that undermines the long-tail advantage of the razor-and-blades model.

3) Brand loyalty was stronger back in “olden tymes”. Now, only a few companies have a deep attachment to brand — Apple comes to mind, for example. On the whole, consumers are happy to jump to competing makers and alternative products; loyalty is not so much assumed as earned. “Younger consumers are more willing to try new brands and increasingly skeptical of legacy products,” according to the Boston Globe.

4) And then there is the sleaze factor. Consumers are savvy these days, and they understand that the razor-and-blades model basically coerces loyalty rather than earns it. In that same Boston Globe report, Jeff Raider, the founder of Harry’s, a shave club subscription business, makes this clear:

• “It’s not about two dollars a blade or three dollars a blade or four dollars a blade,” Raider said. “It’s emotional. It’s about making customers feel like they’re being treated fairly, like they’re getting a good deal.”

Maybe I’m being harsh when I say “sleaze factor,” but listen to Daniel Altman at FP:

• Not by coincidence, the razor-and-blades model has a lot in common with addiction. You get to try a product at price that’s often lower than the actual cost, and then you pay through the nose when you get hooked. This model isn’t based on the merit of the product; instead, it exploits several weaknesses in how consumers make decisions.

It is hard to take the moral high ground when your business model is the same as a drug dealer’s. “The first hit is free,” indeed.

TAKE-AWAY FOR SUBSCRIPTION COMPANIES

The power of locking in your customer base is attractive, even if it may be morally dubious. On the other hand, imposing some cost to unsubscribe is reasonable, especially if you are honest about it. Amazon’s Kindle is a razor that supports ebook blades. Amazon makes it a little more than somewhat difficult to read Kindle ebooks on other devices — that’s a cost that the user understands from the start.

But understand the incentive you create for your customer — locked-in features incentivize some customers to try to jailbreak or circumvent the locks. That leads to an arms race that razor-and-blades companies cannot win. The record industry may have shut down Napster, but it lost in the court of public opinion. So for subscription companies, a little lock-in goes a long way.

TAKE-AWAY FOR RAZOR-AND-BLADES COMPANIES

The strength of your model is decreasing. In order to enjoy the benefit of a recurring customer base, treat users as clients rather than cash cows. Inspire loyalty by building community and demonstrating value. That may mean charging more for your razors and being upfront about the cost-to-value ratio of your consumables. It likely will not mean using digital rights management, proprietary software, and legal action to enforce your old model.

Paraphrasing an academic researcher, Matt Palmquist at strategy+business offers very similar advice:

• The real key is offering a suite of products and services that provide recognizable value to customers, throughout the front- and back-end process. If every phone, razor, and media platform is becoming indistinguishable from every other, perhaps firms need to engage with consumers in a different way, and offer services, upgrades, and marketing outreach efforts that achieve true customer loyalty, beyond what a fixed contract or proprietary lock-in could ever do.

A CASE STUDY

In a bit of an ironic twist, here’s a prime example of an industry in which the strengths of the subscription model have overpowered the razor-and-blades model: that’s the razor industry itself!

Although the sun has long set on the old safety razor invented by King Camp Gillette, razor makers still focused on high-priced cartridges for a strong bottom line. That is changing now, with new subscription-based upstarts who are demonstrating that there is a better way to sell razors and blades than by razor-and-blades business. In an in-depth Boston Globe report, Jeff Harder summarizes the recent history of game change:

• New brands like Dollar Shave Club and Harry’s have gained millions of customers by selling no-frills razors at a discount, shipping them to customers’ doors instead of Walmart’s shelves, and undercutting what they’ve framed as Gillette’s wallet-emptying razor-industrial complex.

And compare the old school way of doing business to the modern mode that Forbes’ Paul Earle gushes about:

• Harry’s is one of my favorites in the “new world order” of consumer brands emerging today, with their beautifully-designed and highly functional products; modern, omnichannel business model; deep commitment to customer service; and authentically fun personality.

The new upstarts and their subscription-oriented business model has indeed moved the needle on the entire industry. Gillette is cutting prices and launching its own shave club. I’d say that the old razor-and-blades model truly does have less relevance for the firms selling razors and blades these days.

Insider Take

There’s no question that subscription companies should understand the strength of the razor-and-blades model — and should understand the importance of using coercive business practices sparingly! For razor-and-blades companies, there may be a lot of value in adopting more subscriber-like features: building customer loyalty, delivering value commensurate with cost, and treating customers as partners and clients rather than as adversaries and marks.