Razor and Razor Blades Business Model PDF

Understanding the Razor-and-Blades Business Model Analyzing Success, Failures, and Evolution Paul Fox, PhD Business Model Design Business Model Design Page 1 R...

Understanding the Razor-and-Blades Business Model Analyzing Success, Failures, and Evolution Paul Fox, PhD Business Model Design Business Model Design Page 1 Razor and Razor Blades Business Model Design Page 2 Razor and Razor Blades What is Disruptive Innovation? Disruptive innovation refers to a process where a smaller company with fewer resources challenges established businesses by offering more affordable, accessible, or convenient solutions that overtake the mainstream market. Examples: Digital Cameras (disruptor) vs. Film Cameras (disrupted) Streaming Services (disruptor) vs. Cable TV (disrupted) Reference: Clayton Christensen, The Innovator's Dilemma (1997). Business Model Design Page 3 Razor and Razor Blades Disruptive innovation “A disruptive innovation is an innovation that helps create a new market and value network, and eventually disrupts an existing market and value network (over a few years or decades), displacing an earlier technology.” Business Model Design Page 4 Razor and Razor Blades Disruptive innovation Coined in 1995 by Clayton M. Christensen Creates a new market/segment with new customers Examples: Uber, Netflix, Skype, Google apps, Ford model T, Cloud computing, Business Model Design Page 5 Razor and Razor Blades Characteristics of Disruptive Innovation Starts in a niche market with lower performance. Improves over time and attracts mainstream customers. Eventually overtakes established players. Most disruptive innovations combine a technological innovation with a business model innovation Reference: Clayton Christensen, Harvard Business Review, 'Disruptive Innovation' (2015). Business Model Design Page 6 Razor and Razor Blades Interactive Activity Instructions: Identify the disruptive innovation within these industries. 1. Music Industry: Traditional - CDs and MP3 Players. Disruptor(s): __________ 2. Retail: Traditional - Brick-and-mortar stores. Disruptor(s): __________ Business Model Design Page 7 Razor and Razor Blades Introduction to the Razor-and-Blades Business Model Definition: The razor-and-blades model is a pricing strategy where a product (the 'razor') is sold at a low price, often at a loss, to increase sales of complementary consumable products (the 'blades') which have higher margins. Origins: First made famous by Gillette. Key Concept: The initial low-cost entry encourages customers to buy into a system, then repeat purchases drive long- term profitability. Reference: Schmalensee, R. (1979). Market Structure, Durability, and Maintenance Effort. The Bell Journal of Economics. Business Model Design Page 8 Razor and Razor Blades Examples of Success Gillette (Razors and Blades): – Low-price razors, high-margin blades – Success drivers: Brand loyalty, innovation in blades, and strong distribution. Printer Manufacturers (Printers and Ink): – Printers sold at low prices, ink cartridges at a premium. – Success drivers: Proprietary ink cartridges, locked ecosystems. Video Game Consoles (Consoles and Games): – Consoles sold at a loss, profits made through game sales and subscriptions. – Success drivers: Exclusive game titles, long-term engagement. Reference: Osterwalder, A., & Pigneur, Y. (2010). Business Model Generation. Business Model Design Page 9 Razor and Razor Blades Key Success Drivers 1. Customer Lock-In: Once consumers buy the initial product, they are committed to purchasing compatible consumables. 2. Brand Loyalty: Ongoing innovation or perceived quality sustains customer trust. 3. High Switching Costs: Consumers face financial or psychological costs when switching to alternative brands. 4. High Margins on Consumables: The profitability lies in repeat consumable purchases. Reference: Porter, M.E. (1998). Competitive Strategy. Business Model Design Page 10 Razor and Razor Blades Discussion Question Why do you think customers continue buying expensive consumables in the razor-and-blades model, even though they are aware of the long-term costs? Which examples do you continue to use? Which have you stopped using? Why? Why do you think some companies fail to maintain their razor-and-blades business model, despite early success? Examples? Business Model Design Page 11 Razor and Razor Blades Case Study: Apple (iPhone and Accessories) iPhone and proprietary accessories: – Premium pricing on accessories (chargers, cases, etc.) – Apple ecosystem lock-in – Continuous product innovation Result: High customer loyalty and profitability through the sale of accessories. Business Model Design Page 12 Razor and Razor Blades Examples of Failures – in most razor and blades model, the razor is worthless without the blades. But competitors can substitute or eliminate the need for blades. Kodak (Cameras and Film): – Attempted to leverage a razor-and-blades model by keeping film profitable but failed to innovate with digital photography. – Failure Drivers: Resistance to technological change, failure to pivot to new consumer demands. Keurig (Machines and K-Cups): – Keurig attempted to lock in customers with proprietary K-Cups, but generic pods soon flooded the market. – Failure Drivers: Lack of patent protection, lower-cost alternatives entering the market. Reference: Christensen, C.M. (1997). The Innovator's Dilemma. Business Model Design Page 13 Razor and Razor Blades Gillette business model Business Model Design Page 17 Razor and Razor Blades Gillette's Competitive Moat Brand Loyalty: Trust built over decades. Patented Blade Technology: Protects Gillette’s market from competitors. Innovation in Product Lines: Continuous innovation in razor design (e.g., five-blade razors). Extensive Distribution Network: Available in stores globally. Business Model Design Page 18 Razor and Razor Blades Dollar Shave Club https://youtu.be/ZUG9qYTJMsI?si=TfK5digrgjCy5REi Business Model Design Page 19 Razor and Razor Blades Case Study: Dollar Shave Club Dollar Shave Club disrupted the traditional razor-and-blades model by: Offering razors at a low cost with a subscription-based model. Providing direct-to-consumer delivery, eliminating the need for retail stores. Success Drivers: – Low-cost, high-convenience subscription. – Humorous, viral marketing campaigns that appealed to a younger audience. – Gillette's response: Introduced Gillette On Demand to compete in the subscription space. Reference: Teece, D. J. (2010). Business Models, Business Strategy and Innovation. Business Model Design Page 20 Razor and Razor Blades Evolution of Gillette's Business Model Introduced subscription services with 'Gillette On Demand' to compete with subscription-based challengers like Dollar Shave Club. Moved towards personalized marketing and digital platforms to engage directly with customers. Expanded product offerings (grooming products, skincare, etc.). Business Model Design Page 21 Razor and Razor Blades Harry’s https://www.youtube.com/watch?v=BJJkUJCPN6s Business Model Design Page 22 Razor and Razor Blades Business Model Design Page 23 Razor and Razor Blades Evolution of the Razor and Blades Business Model Subscription Services: – Companies like Dollar Shave Club evolved the model by selling subscription razors and blades, removing the need for retail presence. Freemium Models: – Digital services like Spotify or software companies (e.g., Adobe) offer free basic versions and charge for premium features or content. Bundling: – Amazon Prime (subscription and products): Encourages regular consumption by bundling a variety of services. Reference: Teece, D. J. (2010). Business Models, Business Strategy and Innovation. Business Model Design Page 24 Razor and Razor Blades Examples of Razor and Razor Blades in a Digital context Business Model Design Page 25 Razor and Razor Blades Exercise: Business Models in Video Games 1. Pick 2 video games: one from the console/PC category and one from the mobile game category. 2. Research the business models for each game: - Who: Who are the target players? - What: What is the value proposition? - How: How does the value chain work (left side of the BMC)? - Why: How does the game generate revenue? (include evidence that they’re successful) (Hint: what are the economics of skins?) - Competitive Moat: What gives the game a long-term advantage? 3. Which business model patterns are they applying? 4. Prepare one slide for each game to present. Make sure to include your insights, not just descriptive information. Business Model Design Page 26 Razor and Razor Blades Examples: Console/PC Games Console/PC Games: - Fortnite - Minecraft - Call of Duty: Warzone - The Sims 4 - Counter Strike Mobile Games: - Candy Crush Saga - Clash of Clans - PUBG Mobile - Genshin Impact - Pokémon Go Business Model Design Page 27 Razor and Razor Blades Summary and Conclusion The razor-and-blades model is built on customer lock-in and high-margin consumables. Success depends on brand loyalty, high switching costs, and strong customer engagement. The razor-and-blades model has evolved significantly across various industries, with subscription and freemium adaptations. Companies have successfully transitioned their models to adapt to changing consumer preferences. Business Model Design Page 29 Razor and Razor Blades To prepare for next Wednesday – do research to prepare for Lia MacFarland’s visit What was HP’s original business model for selling printers to consumers? How has it evolved over the years (look for at least 2 pivots)? What’s their competitive moat and how has it evolved? Do you think they can maintain their competitive advantage? Why or why not? How have new technologies challenged their original model? How are the business models for the competitors (like Canon or Epson) similar or different? What new competitors have emerged and how are their business models different? Is there a DSC or a Harry’s in their industry? What do you think they can do to improve in the future? Business Model Design Page 30 Razor and Razor Blades APPENDIX Business Model Design Page 31 Razor and Razor Blades 1. Apple (iPhone and App Store) Who: Targets a wide range of customers, from tech-savvy to general consumers. How: Sells iPhones at a premium; profits from apps and subscriptions. What: iPhone is the entry point to the ecosystem, leading to recurring service revenue. Why: Locks users into the Apple ecosystem, ensuring ongoing revenue. Competitive Moat: Strong brand, ecosystem lock-in, and seamless integration. Business Model Design Page 32 Razor and Razor Blades 2. Amazon (Kindle and E-books) Who: Targets avid readers, professionals, and book lovers. How: Sells Kindle e-readers at low prices; profits from e-book sales and subscriptions. What: Kindle serves as the entry point to Amazon's e-book ecosystem. Why: Encourages users to remain in the Amazon marketplace for reading materials. Competitive Moat: Vast digital content library and pricing power due to size. Business Model Design Page 33 Razor and Razor Blades 3. Microsoft (Xbox and Game Pass) Who: Targets gamers of all ages, from casual to hardcore. How: Sells Xbox consoles competitively; profits from Xbox Game Pass subscriptions. What: Xbox is the entry point for ongoing gaming engagement. Why: Game Pass locks users into the Xbox ecosystem with continuous access. Competitive Moat: Massive library of exclusive games and strong developer relationships. Business Model Design Page 34 Razor and Razor Blades 4. HP (Printers and Ink Cartridges) Who: Targets individual consumers and businesses needing printing solutions. How: Sells printers at low prices; profits from ink cartridge sales and subscriptions. What: Printers serve as core products requiring regular ink purchases. Why: The model ensures ongoing ink revenue, encouraging loyalty through subscriptions. Competitive Moat: Strong brand presence and patent protection for cartridges. Business Model Design Razor and Razor Blades Page 35 5. Adobe (Creative Cloud Subscription) Who: Targets creative professionals, freelancers, and students. How: Offers Creative Cloud as a subscription; ongoing revenue from software access. What: Subscribing provides access to powerful software tools without full upgrades. Why: Predictable revenue model and continuous access to the latest features. Competitive Moat: Dominance in creative software market and high switching costs. Business Model Design Razor and Razor Blades Page 36